Hill review: A mountain of changes to the UK listing regime?

On March 3, 2021, the UK Listing Review (led by Lord Hill) published its report setting out a series of wide-ranging recommendations for changes to the UK listing and prospectus regime. These represent the most significant proposed reforms for many years and place a strong emphasis on the regulators’ role in promoting the UK equity capital markets and ensuring they remain sufficiently dynamic and competitive. The recommendations are bold and broad-ranging, although generally the task of proposing detailed rule changes is left to other bodies such as the Financial Conduct Authority (FCA) and HM Treasury (HMT). Nonetheless, the robustness with which the report identifies the need for reform means that we can expect the FCA and Government to follow up with more detailed proposals in the near term – the direction of travel is clear. Indeed, the FCA has welcomed publication of the recommendations and indicated that it intends to make relevant rules by late this year.

Recommendations made in the report cover a range of key areas including: making dual-class share structures eligible for premium listing; changes to free float requirements, such as reducing the free float from 25 per cent to 15 per cent; a fundamental review of the current prospectus regime; making changes to facilitate the provision of forward-looking information to investors; giving consideration to a more efficient process for existing listed issuers to raise capital and facilitate the involvement of retail investors; and revisiting the rules on unconnected research on IPOs.

Our views

The increased flexibility to make and amend rules following the UK’s exit from the EU is a theme which runs across a number of the recommendations, in particular the proposed review and overhaul of the prospectus regime. We agree that there is merit in this, and in particular the idea that there should be a greater differentiation between the prospectus requirements for an IPO compared to a subsequent fundraising by an existing listed company. It will be up to the FCA and Treasury to implement the recommendations and it remains to be seen to what extent they will agree to a reduction in disclosure requirements. There is an inherent tension between the desire to reduce the disclosure burden for companies and ensuring an appropriate degree of protection for investors (including retail investors, whose increased participation in capital raisings is also identified as a priority).

The report’s recommendations on dual-class share structures have received the most media attention. Dual-class share structures are invariably favoured by founders who want the profile and access to the public markets that a listing brings without ceding too much control of their business. These structures are particularly attractive to founders of high-growth or technology “unicorns”, providing weighted voting rights to entrench their management positions and prevent opportunistic takeover activity. It has been suggested that their incompatibility with a premium listing has been a deterrent to such companies seeking a London IPO versus going to the US or Hong Kong, where dual-class share structures are more common. Whilst the report supports the eligibility of dual-class share structures for admission to the premium segment, it also recommends a number of conditions for their use to maintain high governance standards. These include a five-year “sunset” provision after which the weighted voting rights fall away. They also include requirements that the weighted voting shares are held only by directors and that weighted voting applies only to votes on the removal of founders from the board and blocking a change of control. These conditions recognise the balance to be struck between attracting founder-led companies whilst respecting the overarching principle of “one-member one-vote” that has been a cornerstone of the UK-listed company markets. Regulators may find that, by facilitating dual-class structures, weighted voting rights are adopted by a wider range of listing applicants who may otherwise have been willing to list without them, without necessarily attracting the listing applicants the reforms are targeting. The question also remains as to whether “unicorns” are really put off the UK markets because of the restrictions on dual-class structures (which can already be accommodated on the standard listing segment) or simply because they believe they can obtain better valuations and a stronger investor following elsewhere.

The recommendations on changes to the free float requirements are also significant. The report notes that the current rules are seen as one of the strongest deterrents to companies when they consider where to list, particularly for high growth companies and companies with a very large expected market capitalisation. The recommendations include, among other things, a reduction of the required percentage free float from 25 per cent to 15 per cent, changes to the categories of shares that are treated as being in “public hands” and the ability to use alternative measures to demonstrate that there will be sufficient liquidity following listing. As the report notes, index providers will also need to engage with their users to consider how their approach to free float should adapt to keep pace with any FCA rule changes. We expect that the introduction of a more nuanced approach by the FCA which is explicitly focussed on liquidity rather than absolute public float thresholds would be welcomed by the market.

SPAC listings are also identified as an area for reform – listing of these “special purpose acquisition companies” enables shell companies to gain a standard listing on the strength of their management team and to raise capital in anticipation of future acquisitions. The report notes that there are far fewer SPAC listings in London compared to competitor markets and identifies as a deterrent the current rule that generally requires a SPAC’s shares to be suspended from trading when a potential acquisition is announced. Whilst the removal of this provision may help reduce investor concerns that they will be “locked in” to a SPAC, we expect further regulatory change and support will be needed if SPAC listings are to become a more prominent feature of the UK market, including providing clearer regulatory policy direction if SPAC listings are indeed to be encouraged. The report recommends that rules are introduced to align the UK more closely with other jurisdictions, including in relation to the disclosure of information on proposed acquisitions, shareholder votes on acquisitions and redemption rights. Whilst these proposals are obviously intended to increase investor confidence, it is worth noting that one of the current differentiating factors of the UK regime is the fact that standard-listed SPACs are able to effect acquisitions of target businesses without the need to seek shareholder approval. This arguably gives UK-listed SPACs and their sponsors a competitive advantage and greater flexibility over other markets where such approval is required and redemption rights are available to investors. An analysis of the UK and US SPAC regimes can be found in our separate briefing SPACs: The London alternative.

The report also makes a number of other recommendations which are less likely to hit the headlines, but are to be welcomed, including introducing a greater degree of flexibility in relation to the rules around track record and historic financial information. It also suggests that the current relaxation to the requirement for a revenue earning track record applicable to scientific research-based companies should be extended to include high growth, innovative companies from other sectors that are able to show they are sufficiently mature in ways other than through positive revenue earnings. As these rules have not substantively changed since they were first introduced in the 1990s, their revision is to be welcomed and we hope to see the sectors covered being sufficiently expanded to enable the next generation of innovative companies to access the London equity markets at the time they most require capital.