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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
United Kingdom | Publication | dicembre 2023
Update – March 2024: On 7 March 2024, the FCA published an updated draft instrument which contains tranche two of the new UK Listing Rules (alongside the original tranche one drafting appended to CP23/31) with the new content including, amongst other things, the draft rules for the closed-ended funds, shell companies, secondary listing and GDR categories - the updated instrument supersedes the draft rules appended to CP23/31 and should be taken as the full and complete draft UKLRs for consultation purposes. At the same time, the FCA also published proposed consequential changes to other FCA Handbook sourcebooks including the DTRs.
Although 22 March 2024 remains the closing date for CP23/31, consultation submissions in relation to the additional tranche two material (and the consequential changes instrument) will be accepted until 2 April 2024. The FCA has also noted that it is in the process of reviewing and updating its Technical and Procedural Notes and expects to consult on these in two Primary Market Bulletins during April and June. It will also publish certain draft forms during that same period.
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 by the FCA with a marked shift towards a more disclosure-based framework, reflecting its underlying intention of encouraging a more diverse range of issuers to list on UK markets (and to do so at an earlier stage) whilst providing investors with sufficient information to be able to exercise stewardship and other shareholder rights so as to influence company behaviour.
In this briefing, we consider the key requirements for the new equity shares in commercial companies (ESCC) category, some of the main changes from the position outlined in the previous consultation, and the transitional provisions the FCA intends to apply to existing premium listed commercial companies and standard listed share issuers.1
The consultation closes on 22 March 2024 with feedback and final rules expected in summer 2024. It is intended that the final rules would come into force two weeks after they are published.2
Whilst the approach set out in the consultation is largely consistent with that proposed previously, certain changes have been made in response to feedback. There is also now greater clarity on the detail in a number of areas, and draft rules have been published for the new ESCC category.
Key changes from the position outlined in the FCA’s previous consultation include:
The table below includes a high-level comparison of key requirements for the proposed ESCC category and those applicable to a current premium commercial company listing.
ESCC category | Premium listing | |
Eligibility | ||
Minimum track record requirements |
No |
Yes |
Clean working capital statement |
No | Yes |
Control of business |
No |
Yes |
Independent business |
No |
Yes |
Business independent of any controlling shareholder |
Yes | Yes |
Controlling shareholder agreement (if applicable) |
Yes |
Yes |
Minimum free float (10%) |
Yes |
Yes |
Minimum market capitalisation (£30m) |
Yes |
Yes |
Pre-emption rights |
Yes |
Yes |
Shareholder approval required for… |
||
Significant transactions |
No* |
Yes |
Related party transactions |
No** |
Yes |
Reverse takeovers |
Yes |
Yes |
De-listing+ |
Yes |
Yes |
Sponsor appointment required for…++ |
||
Initial admission to listing |
Yes |
Yes |
Significant transactions |
No |
Yes |
Related party transactions |
If fair and reasonable opinion required |
Yes |
Reverse takeovers |
Yes |
Yes |
Corporate governance |
||
Comply or explain against UK Corporate Governance Code |
Yes |
Yes |
Dual vote on election/re-election of independent directors (if there is a controlling shareholder) |
Yes |
Yes |
Premium listed commercial companies
Existing premium listed companies would automatically be mapped to the ESCC category when the new regime goes live.
Standard listed share issuers
Certain existing standard listed commercial companies would be mapped by the FCA 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.
The consultation confirms the proposed radical overhaul of both eligibility and continuing requirements, albeit as discussed, the FCA has changed its approach in some areas in response to the feedback it has received.
That this feedback included a divergence of views between the buy-side and sell-side in relation to proposals for removal of the shareholder vote on significant and related party transactions is unsurprising. The enhanced disclosure regime included in the current consultation represents a pragmatic compromise in relation to significant transactions. It recognises the long-held concern that current shareholder approval requirements put UK premium listed issuers at a material disadvantage to other prospective buyers (including those listed on international markets), while still providing transparency for investors. In practice, we would expect companies to continue to engage with their major shareholders in relation to significant transactions notwithstanding the removal of the need for a shareholder vote. For related party transactions, the retention of a requirement for a sponsor-backed “fair and reasonable” confirmation at 5%+ represents an important safeguard for investors, notwithstanding the removal of the requirement for shareholder approval.
The provision of greater clarity on transitional provisions will be welcomed by existing issuers. In particular, confirmation that the new “transition” category is not intended to be time-limited will give comfort to those existing standard listed share issuers that would be unable (or unwilling) to transfer to the new ESCC category. In the case of existing premium listed issuers, automatic conversion to an ESCC listing makes sense, given that the requirements would be less onerous than the current rules. The fact that the FCA has given thought to the position of companies with a primary listing overseas is also positive, with the confirmation of a new, tailored, listing category for such issuers (albeit only where they are non-UK incorporated).
In our view, the proposals should result in a more internationally competitive regime, with the potential to encourage listings by a more diverse range of companies. It is positive that the FCA has seized the opportunity for effecting meaningful reform to reinforce London’s position as a global listing venue of choice, however this is only one aspect of improving the attractiveness of the UK’s capital markets. As the FCA has noted previously, changes to its rules are part of the debate but will not necessarily (in and of themselves) result in more UK IPOs given that a number of broader considerations (including indexation, valuation dynamics and investor/analyst depth and expertise) remain key to companies’ decisions on where to list. In due course, whether the proposed regulatory changes are accompanied by demand side reforms, such as further measures to promote greater investment by UK pension and insurance funds in UK listed equities, could also be a material factor.
The reform of the listing regime was first kicked off by publication of the Hill Review back in spring 2021 - as such, these changes have been a long time coming. Whilst this may be unsurprising given the significance of the reforms ultimately proposed, it will be key for the new rules to be finalised and implemented swiftly in order for momentum to be maintained.
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