What will the new UK listing regime mean for M&A?

Introduction

The new listing regime has now come into force. In this briefing we focus on key provisions of the significant transaction rules relevant to acquisitions and disposals by companies in the new equity shares in commercial companies (ESCC) category, how these compare to the historic requirements of a premium listing, and the potential impact on M&A activity by listed issuers.

For a more general overview of the new ESCC category, see our separate briefing UK listing reforms: Radical reset to take effect on 29 July 2024.

Conditionality and execution risk

Historically, in particular in respect of auctions and other competitive processes, the requirement for shareholder approval of Class 1 transactions put premium listed issuers at a potential disadvantage to their peers on other markets and to unlisted or private equity buyers given the associated execution risk and timing implications. As the FCA recognised, this represented an opportunity cost for issuers (and their investors) and could result in them feeling the need to offer a material premium over other buyers in order to be considered or to agree to break fees to compensate for this.

Although the removal of the requirement for a shareholder vote on transactions (other than reverse takeovers) by ESCC companies was one of the more controversial changes to the rules, it should result in a more level playing field for listed issuers in the context of M&A where there is competitive tension. While specific requirements do apply to “significant transactions” under the new rules these are purely disclosure-based (see further below).

The meaning of “significant transaction”

Under the new rules, a significant transaction is (in summary) one that represents 25%+ on any of the class tests.¹  This is very similar to the previous definition of a Class 1 transaction, however there are a few important differences to be aware of, including those discussed below.

Removal of the profits test: As previously, the size of a transaction will be assessed by reference to the class tests. However, the profits test has been removed on the basis that it often produced anomalous results in practice.

Ordinary course transactions: Ordinary course transactions remain outside the scope of the significant transaction rules, with detailed new guidance included in this area. In the context of M&A, it is worth noting that mergers with/acquisitions of other businesses (whether structured by way of share or asset acquisitions) are specified as being unlikely to be ordinary course.²

Treatment of break fees:³ The new rules make it clear that break fees are excluded from the definition of transaction, meaning that they will not be treated as significant transactions in their own right. This can be contrasted with the position under the old rules where a break fee representing over 1% of the issuer’s market capitalisation (or, if the issuer itself was being acquired, over 1% of the aggregate offer value) would be treated as a Class 1 transaction on a standalone basis. Although the listing rules no longer restrict a company’s ability to agree a break fee of over 1%, thus potentially offering greater flexibility, other considerations may still be relevant in the context of whether a break fee is acceptable and (if so) the appropriate level. These include (among other things) directors’ fiduciary duties, the rules on financial assistance and penalties and, if applicable, the UK Takeover Code.

Sponsor involvement

Premium listed companies previously had to seek guidance from/appoint a sponsor in connection with Class 1 transactions and reverse takeovers. Under the new significant transaction rules, a sponsor is only required in connection with reverse takeovers or where individual guidance on, and/or a waiver or modification of, the rules is sought (see below where the transaction also involves a related party element). ⁴ 

We anticipate that, notwithstanding the changes to the rules, issuers will generally continue to consult with their broker or financial adviser in connection with material transactions (including in relation to the application of the class tests).

Shareholder engagement

We expect that, where appropriate, companies will still want to engage with major shareholders in relation to material transactions, even though (absent a reverse takeover) a vote is no longer needed under the significant transaction rules. In this context, it is helpful that the FCA has amended its guidance on circumstances when selective disclosure of inside information may be justified to refer to disclosure made to major shareholders in order to ensure the viability of a proposed major transaction (whether or not prior shareholder approval is required).⁵

More generally, it should be noted that shareholder approval may still be necessary for other reasons - for example to authorise an associated share issue or in connection with any related Rule 9 waiver under the Takeover Code.

Disclosure of significant transactions

The revised significant transaction rules do still mandate specific information that must be disclosed to the market (see further below in relation to additional disclosure requirements where the transaction involves a related party element).

The information that must be included in the announcement of a significant transaction (see the table below) is much more streamlined than would historically have been required for a Class 1 circular. Among other things, a working capital statement is no longer necessary and, where an issuer chooses to include financial information on an acquisition, it does not have to be restated to be consistent with its own accounting policies. The content requirements, combined with the fact that the announcement will not require prior FCA review or approval, will mean that companies and their advisers are able to compile the relevant information more easily and finalise the announcement more efficiently.

The rules also give issuers a degree of flexibility where appropriate by allowing for split disclosure with certain information announced upon the transaction being entered into and further details provided subsequently – as summarised in the table below.⁶  However, issuers will still need to ensure they comply with the disclosure requirements of the UK Market Abuse Regulation (UK MAR) at the time of initial announcement.

Supplementary notifications will be required prior to completion in certain circumstances (including where there is a material change to the terms of the transaction).

Disclosure below the significant transaction threshold

The concept of Class 2 transactions (5%+) does not exist under the new rules. However, companies will still need to consider what disclosure, if any, is required or appropriate in respect of transactions below the significant transaction (25%+) threshold. Relevant factors will include whether the transaction constitutes inside information under MAR, the specifics of the deal in question and the company’s usual approach.

See below in relation to additional disclosure requirements where the transaction involves a related party element.

Additional considerations where the transaction includes a related party element

Unless an exemption is available, a related party transaction will trigger additional requirements if it represents 5%+ on any of the class tests⁷  - in particular:

• Before the transaction is entered into, it must be approved by the issuer’s board⁸  and a written fair and reasonable confirmation must be obtained from a sponsor.
• An announcement must be made as soon as the terms of the transaction are agreed and must contain certain specified information including (among other things) a statement by the board that, having been so advised by a sponsor, the transaction is fair and reasonable as far as holders of the company’s securities are concerned. Supplementary announcements may also be required in certain circumstances.

Conclusion

In our view, the new rules should have a positive impact on M&A activity by listed issuers. The move to a primarily disclosure-based approach means that ESCC companies will be competing on a more even playing field, can be more nimble in exploring potential opportunities and will have greater flexibility around how they execute their M&A strategy.

The inclusion of additional guidance on when transactions are likely to be ordinary course provides greater clarity and certainty to issuers and their advisers. The removal of the profits test is also welcome – in our experience (and consistent with the FCA’s comments) it often produced anomalous results in practice.

Going forward, changes to the UK prospectus regime currently being consulted on by the FCA will also be relevant to M&A activity. In particular, the proposal to increase the current annual exemption for further admissions from 20% to 75% would, if adopted, give listed companies greater flexibility to issue shares in connection with acquisitions (either as consideration or to raise cash) without the need for a prospectus. For further information on the FCA’s proposals see FCA consultation on reform of the UK prospectus regime: Key takeaways for equity issuers.