The Financial Conduct Authority has announced a new listing regime for London effective from 29 July. Less than a week after she became Chancellor, the FCA quotes Rachel Reeves as saying: "These new rules represent a significant first step towards reinvigorating our capital markets, bringing the UK in line with international counterparts and ensuring we attract the most innovative companies to list here."
Although arriving just as we usher in a new Government, change has been in progress for a while and the stakes are high. In 2021 the UK Listing Review, chaired by Lord Hill highlighted "a decline of 40% in the number of companies listed in the UK between 2008 and 2020" and that "the UK accounted for only 5% of global initial public offerings (IPOs) of companies between 2015 and 2020". It has been recognised that while the UK has a thriving private fundraising market for growth companies, as they scale, the fundraising options reduce. Other markets abroad have allowed founders to list whilst protecting them from short-term demands of the listed shareholders, allowing them time to bring the company to profit – the IPO of Google in 2004 being the leading example. In other ways too, the UK's gold standard listing regime (the 'premium segment') which sets the requirements for listings on the London Stock Exchange qualifying for the most prestigious FTSE indices, has been seen as creating barriers to entry which go beyond other markets.
Although after the Hill review, the FCA moved to introduce some limited changes in 2021 including to allow limited 'dual class share structure' and a 'Special Acquisition Company' regime, there has been little improvement in the number of listings. The most recent set of changes go much further. Indeed, the FCA claims they are the "biggest changes to the listing regime in over 3 decades". This appears to be true. There is new terminology to master with revised listing categories. For the category for 'commercial company' equity listings which will replace the premium listed segment, there are reduced eligibility requirements and revised and less onerous continuing obligations. Familiar requirements such as: shareholder approval for class 1 and related party transactions; and for there to be "controlling shareholder agreements" – each introduced after corporate governance failures - have been swept away or softened. With the aim of attracting innovative companies with strong founders and which have attracted later stage pre-IPO investment, the new rules also bring increased flexibility with dual class share structures and weighted voting.
To restore market competitiveness, the FCA is deregulating and opting for a more disclosure-based regime and an investor led approach to market risk. In doing so, it has reminded the market that other broader regulatory checks such as the market abuse, prospectus, disclosure and transparency and financial reporting regimes still apply – although we are expecting further reform of the prospectus regime. In deregulating, the FCA is also looking to company law and corporate governance standards to support good governance and conduct by issuers and stakeholder engagement. Noting that they have 'played their part' the FCA state "Regulatory reform is only one of the changes required to reinvigorate the UK's public markets'. 'Others will need to consider what they too can do." The FCA points out that "the reforms may mean that investors change how they engage with companies, making more use of shareholder rights at law and other mechanisms to scrutinise boards and business strategies".
It will be interesting to see how the markets react and whether shareholder activism will be on the rise, particularly given the added complexity which new control frameworks with dual class share structures could introduce. As regulation is reduced, new governance expectations may start to emerge.
Some of the key changes for equity listings are explained below. A reminder, these changes do not impact AIM, the LSE's market for unlisted securities, which has also seen a steady drop in the number of companies admitted: for example, dropping 30% from 1,104 to just 742 since 2015. However, with other initiatives afoot, such as the proposed creation of PISCES, an intermittent trading venue for private companies, which we have written about here, there does seem to be momentum for change to the fundraising ecosystem.
New categories of listing
The FCA has restructured the previous listing 'segments' into new 'categories' of listing. For equity share listings, there will be a new single category for UK or overseas companies with a primary listing in London called 'Equity Shares (Commercial Companies)' (ESCC). It will replace the current 'Premium' and 'Standard' categories. Separate categories are being introduced for: Shell companies and SPACs (Special Acquisition Companies); and, for non-UK incorporated companies with an existing primary listing in another jurisdiction, the 'International Commercial Companies' (ICC) category). Premium listed companies will be automatically transitioned to the new ESCC category and qualify for inclusion in the FTSE indices. Standard listed companies will be either moved to the 'Shell company and SPAC' or ICC, where appropriate, or moved to a new 'Transition' category if they cannot or do not wish to transfer to the ESCC.
Reduced eligibility requirements for the new ESCC category
These have been reduced as compared to the 'premium' segment. Key changes include:
- Removal of requirements for financial information covering at least 3 years, representing 75% of the listed company's business for that period and demonstrating a revenue earning track record – thereby allowing listing of companies with limited operating history, which are 'pre-earnings' or with significant recent acquisitions.
- No requirement for an unqualified working capital requirement.
- Removal of the condition that the company must show an intention to carry on an independent business as its main activity. The aim is to allow more diverse business models such as companies operating franchise models or making minority investments in other entities). However, a company with a controlling shareholder will be subject to independence requirements (see below).
- Removal of the cap on the total warrants and options to subscribe for equity shares at 20% of issued share capital – this is to give greater flexibility in structuring capital raisings and encourage growth stage companies with existing warrants and options to list.
- More liberal provisions in relation to voting and class structures and controlling shareholders (see below).
Companies will still need a sponsor on admission and at a reduced set of events post admission (see the changes to related party transactions and class tests below).
Changes to dual class share structures and weighted voting
The restrictions on weighted voting for premium listed companies which meant that they could only be held by a director and must 'sunset' (lapse) after five years have been made more liberal. Under the new rules, a company's articles may confer weighted votes on employees and other pre-IPO investors in addition to directors. However, these weighted votes may not be transferred (except to wholly owned companies of the holder) and if a pre-IPO investor is a legal entity, must sunset after 10 years. The weighted votes will also not apply to key shareholder votes in the listing rules which: protect against dilution (employee share schemes, long term incentive plans, discounted options, issues at a discount of more than 10%), share buybacks and cancellation of listing or transferring listing category. Companies' shares of each class must still be freely transferable on listing and there must be a sufficient number of shares of each class in public hands. It therefore appears likely that weighted voting rights to protect founders and existing shareholders would be made available in an unlisted class. However, note that as well as the FCA being able to apply discretion around the listing conditions, multiple classes of shares may be listed. If they are, the rules specify that the aggregate voting rights of the shares in each class should be 'broadly proportionate to the relative interests of those classes in the equity'. Factors including the extent to which the other rights attaching to the shares differ (e.g. as to distributions), liquidity of the classes and commercial rationale for the differences must be considered.
Controlling shareholders and 'relationship' agreements
A 'controlling shareholder' is one who alone - or together with concert parties - holds 30% or more of the voting rights on all or substantially all matters at a shareholder meeting. The new rules no longer require a company to secure operational independence undertakings from a 'controlling shareholder' in a 'relationship or 'controlling shareholder' agreement. Typically, these include undertakings that arrangements between them are on commercial terms. Nevertheless, a company with a controlling shareholder will still need to show that the company can always carry on its business independently from them. So, these agreements may continue to be a useful tool in reassuring the market in certain situations. If a controlling shareholder proposes a vote on a resolution, the company must also circulate any directors' opinion that the resolution circumvents the proper application of the listing rules (if any director believes that to be the case). Other protections have been retained to provide governance protection where there is a controlling shareholder. For example, on the election or re-election of independent directors (as defined in the UK Corporate Governance Code) to the board, a dual vote procedure must be followed involving a separate vote of the non-controlling shareholders.
Related party transactions
Related parties are a company's 'substantial shareholders', persons exercising significant influence, directors of group companies and their associates. The threshold at which a shareholder becomes a 'substantial shareholder' has been increased from 20% to 30%. Transactions between group companies and related parties at or above a 5% size test will no longer need a circular and shareholder approval. However, the board must obtain from its sponsor a fair and reasonableness opinion in relation to the transaction (although this will no longer be needed for smaller related party transactions).
Class test (significant) transactions
The concept of different classes of transactions is being abolished in favour of a new regime. Only 'reverse takeovers' will still require shareholder approval. Instead, where a transaction does not qualify as a reverse takeover but meets any percentage ratio size test of more than 25%, it will be regarded as a 'significant transaction'. Unlike under the old regime, a company need not publish a circular and obtain shareholder approval for 'class 1' transactions. Now it must make a multi-stage set of announcements giving prescribed information (after terms are agreed and then as soon as further prescribed information is collated). The idea is to ease and reduce the amount of documentation and cost required for listed companies to conduct transactions.