Introduction
On May 3, 2023 the FCA published its long-awaited consultation setting out the proposed approach to reform of the London listing regime, focusing on equity shares of commercial companies (ESCC), with the aim of attracting a more diverse range of companies and bolstering the competitiveness of the UK markets whilst maintaining high standards of disclosure and transparency.
The changes go further than the discussion paper published by the FCA in Spring 2022 in a number of respects and represent a radical overhaul of the current listing regime, in particular a marked shift towards a more disclosure-based framework.
Although the consultation sets out the FCA’s blueprint for reform, it does not include detailed proposed rule changes (which will be included in a further consultation to be published in Autumn 2023). However, the FCA is aiming to achieve an accelerated timetable, with substantial progress by the end of the year. The current consultation closes on June 28, 2023.
In this briefing we set out an overview of the key features of the new ESCC listing category and our thoughts on the proposed reforms.
Key features of the ESCC category
A brief summary of some of the key features of the ESCC category is included below, including how these compare to the current rules for premium listed commercial companies.1 It is worth noting that the FCA has dropped the proposals (set out in its previous discussion paper) for a combination of mandatory and supplementary “opt in” continuing obligations – instead, a single regime will apply to all issuers in the ESCC category.2
Eligibility: A more disclosure-based approach would be taken, with no requirement for a three-year financial and revenue-earning track record or to give a “clean” working capital statement. Modified rules would apply in relation to the requirement for issuers to carry on an independent business and have operational control over their main activities, with the intention of creating a more permissive approach to accommodate a range of business models and corporate structures. Free float and minimum market capitalisation requirements will continue to apply.
Significant transactions: Shareholder approval would no longer be required (other than for a reverse takeover).3 Instead, transactions meeting the current Class 1 thresholds would need to be announced to the market (with the announcement containing the information currently required for a Class 2 transaction). There would be no specific Listing Rule disclosure requirements in relation to transactions below the current Class 1 thresholds, although the FCA notes issuers would need to continue to comply with their existing MAR obligations to announce inside information. Changes are also proposed in respect of the class tests, including the removal of the profits test.
Related party transactions: Again, shareholder approval would no longer be required. Instead, transactions of 5%+ under the class tests would require announcement, including (amongst other things) a “fair and reasonable” statement from the board, having been so advised by the company’s sponsor. DTR7.3 would continue to apply in addition to the updated Listing Rule requirements.
Dual class share structures: A more permissive approach would be taken, including the application of enhanced voting rights to all matters (other than approval of share issues at a discount of more than 10%), a ten-year sunset provision after which the enhanced voting rights would fall away (as opposed to the current five years) and no maximum enhanced voting ratio. As is the case currently, shares with enhanced voting rights may only be held by a director, with the shares automatically converting into ordinary shares upon the holder ceasing to be a director (noting that the current provision allowing transfer of enhanced voting rights shares to beneficiaries of a director’s estate would be removed).
Controlling shareholders: Rather than being mandatory, a disclosure-based “comply or explain” approach would be applied to controlling shareholder agreements. The requirements in relation to the election and re-election of independent directors for companies with a controlling shareholder would continue to apply.
Corporate governance code: Issuers would continue to comply or explain against the UK Corporate Governance Code and to comply with other relevant annual reporting requirements currently contained in LR9.
Sponsor regime: A modified sponsor regime is proposed. It is envisaged that the sponsor role on an IPO would largely mirror the current position but that the need to appoint a sponsor in a post-listing context would be reduced.
Delisting: Shareholder approval and an FCA-approved circular would still be required for delisting (including the additional requirements for delisting where the company has a controlling shareholder).
Other: Shareholder votes would continue to be required in relation to discounted share issues and share buybacks in line with current requirements. Pre-emption requirements would also continue to apply.
Scope of the new ESCC category
The single ESCC category would effectively replace the current premium and standard share listing categories for equity shares of commercial companies. Separate listing categories (which would remain largely the same but without the current premium/standard labelling) would be maintained for investment funds4 and for other types of securities5 but:
- A new listing category would be introduced for special purpose acquisition companies (SPACs) and shell companies.
- A new “other shares” listing category would include non-equity shares such as preference shares (the FCA also notes it is considering the position in relation to overseas incorporated issuers with a secondary listing in the UK).
- The FCA is considering whether there is a need to retain the sovereign controlled commercial companies listing category.
Transitional provisions
The FCA intends to put transitional arrangements in place to enable existing share issuers to transfer to the new ESCC category (or other applicable category) and to allow sufficient time to prepare and implement necessary changes.
It notes that, while its expectation is that existing standard listed issuers of equity shares that are commercial companies should transfer to the new ESCC category, it will consider whether those that are not able/willing to do so should be permitted to transfer to the “other shares” category – potentially on a time limited basis.
Our thoughts
The blueprint set out in the consultation represents a radical overhaul of the current rules, with a marked shift towards a more disclosure-based regime which (as the FCA recognises) will put greater responsibility, and associated investment risk, on to investors and shareholders. As such, certain of the proposals (such as those relating to dual class share structures, the ability to list with a qualified working capital statement and the removal of shareholder votes on significant/related party transactions) are likely to be more controversial and less well-received by some market participants. That said, the removal of requirements for shareholder approval and FCA-approved circulars for Class 1 transactions would address a long-held concern in the market that the current rules put UK premium listed issuers at a disadvantage to other prospective buyers in the context of competitive M&A processes – as such, this would potentially have a positive impact on M&A activity.
Whilst the FCA’s proposals should result in a more internationally competitive regime, with the potential to encourage listings by a more diverse range of companies, this is only one aspect of improving the attractiveness of the UK’s capital markets. As the FCA notes, the proposed changes to its rules are part of the debate, but will not necessarily (in and of themselves) result in more UK IPOs, with a number of broader considerations (including indexation, valuation and investor/analyst depth and expertise) being key to companies’ decisions on where to list.
