UK listing regime reform: Implications for listed funds

Introduction

The FCA has now published the second tranche of draft rules in connection with its reform of the UK Listing Regime, including new UKLR 11 which sets out the detail of the regime for closed-ended investment funds. Whilst the general deadline for responding to CP23/31 remains 22 March 2024, submissions relating to the second tranche of the draft rules (including new UKLR 11) will be accepted until 2 April. The FCA has indicated that it intends to publish feedback and final rules in the summer and that these will come into force two weeks after publication.

Although the draft rules are largely modelled on the existing funds regime, with proposed changes that are far less radical than those intended for commercial companies, there are still a number of points that funds and their investment managers should be aware of.

Significant transactions

Shareholder approval will continue to be required by funds for reverse takeovers and significant transactions, in each case where they are outside the scope of the investment policy. For these purposes, significant transactions will essentially be transactions that meet a threshold of 25%+ on any of the class tests.¹ This can be contrasted with the position for commercial companies where it is intended that shareholder approval will only be required for reverse takeovers, with a disclosure-based approach applying to significant transactions.

The concept of class 2 transactions (5%+ on the class tests) is being removed for both funds and commercial companies, although the FCA has stressed that an announcement will be required under MAR where a transaction amounts to inside information.

Related party transactions

The definition of related party is remaining unchanged apart from a proposal to increase the threshold at which a shareholder becomes a related party to 20% (to address feedback that the current 10% threshold is too low in terms of the ability of shareholders to influence the issuer). As currently, a fund’s related parties will include its investment manager and members of the investment manager’s group. The existing additional related party exemption for certain co-investment/financing arrangements with the investment manager or members of the investment managers group is also being retained.

Related party transactions of over 0.25% by funds will require disclosure to the market, board approval and sponsor fair and reasonable confirmation. This diverges from the proposed regime for commercial companies where these requirements will only apply at a threshold of 5% or more.

In addition transactions of 5% or more by funds will require shareholder approval, although only if they are also outside the scope of the fund’s investment policy (there will also be a new requirement for a fund’s investment policy to enable an investor to identify whether related party transactions are within its scope, including the identity of the related party with which the fund may transact and how such transactions support the investment policy). Whilst the removal of the need for shareholder approval of transactions within the scope of the investment policy represents a relaxation of the current rules, again this differs from the approach being taken for commercial companies where the related party regime will be entirely disclosure-based and shareholder approval will not be needed at all.

As for commercial companies, under the new rules funds would no longer be required to also comply with the separate related party regime in DTR7.3.

Board independence

The rules requiring the fund’s board (or equivalent body) to be able to act independently are being retained, but with a new provision in relation to alternative investment fund managers (AIFMs). This has been introduced in response to specific feedback the FCA received and, in summary, provides that notwithstanding an appointment to the board of more than one listed fund with the same AIFM (or another AIFM within the same group as the fund’s AIFM), a director can be considered independent where the AIFM is independent of the fund’s investment manager.

C shares

Where a fund issues a new class of shares intended to convert into an existing class, under the new regime these can either be listed in the closed-ended funds category (if they carry voting rights prior to conversion) or in the new “non-equity and non-voting equity shares” category (if they do not).

Sponsors

The circumstances in which a fund will be required to appoint a sponsor will be largely in line with the current rules, including in connection with IPOs and significant and related party transactions. However, a new requirement is also proposed that would need a sponsor to be appointed in connection with requests for individual guidance or to modify or waive provisions of new UKLR 11.

Our thoughts

The detail of the proposed new rules is in line with the approach outlined when the first tranche of changes was published in December and, as such, there are no significant surprises. 

In the context of related party transactions, we can understand why a divergence from the new rules for commercial companies could be merited where transactions are with an external investment manager (given the particular nature of that relationship and the non-executive role of most fund boards). However, it is not clear why a difference of approach is necessary for transactions (whether or not within the investment policy) involving other related parties such as directors or substantial shareholders, particularly given the need to appoint a sponsor and obtain a fair and reasonable confirmation at 0.25% will require funds to incur additional time and expense at a significantly lower threshold than the 5% applicable to commercial companies. Likewise, the need to seek shareholder approval for related party transactions outside the investment policy at 5%+ (regardless of whether they are with the investment manager or with other related parties) imposes an additional obligation that will not apply to commercial companies.