The FCA has today published Primary Markets Effectiveness Review: Feedback to DP22/2 and proposed equity listing rule reforms, outlining its revised proposals to replace the premium and standard share listing categories for commercial companies with a new single listing segment. This is a continuation of the work that was started with the UK Listing Review. The FCA is planning to move to a more disclosure-based and less rule-based approach to main market regulation, in line with many market discussions in recent weeks and months. Listing requirements will in future focus on transparency for investors to support their decision-making – providing a simpler, more accessible and friction-free UK listing regime for issuers, thereby improving the attractiveness of listing in the UK, and providing a wider range of investment opportunities and full disclosure for investors.
We outline the key changes below. For ease of reference we have reproduced the FCA’s summary table of the proposed changes, available here. If you would like to discuss any matters related to this paper, please get in touch with your usual Freshfields contact.
Key changes from the current premium listing rules
- Track record and ‘clean’ working capital requirements - removed: Eligibility rules will no longer require a three-year financial and revenue earning track record or a ‘clean’ working capital statement. In making these proposals the FCA has assumed that prospectus financial history disclosures will remain substantially the same in the new public offers and admissions to trading regime.
- Independent business and control of business rules - simplified: The FCA is considering modifying the eligibility and continuing obligations requiring that a company has an independent business and has operational control over its main activities, in order to clarify that it is open to diverse business models and potentially more complex corporate structures. The FCA notes in particular the current rules can be difficult for franchise-type models or companies making minority investments in other entities.
- Dual-class share structures – greater flexibility: The FCA has suggested a more permissive approach to dual class share structures (DCSS). This would see enhanced voting rights exercisable on all matters and at all times (with one exception, being the issue of new shares at a discount greater than 10%) and an extended sunset period of 10 years after which enhanced voting rights would cease to be exercisable. Enhanced voting rights would only apply while a holder was and remained a director, but no specified voting ratio or weighting limits would apply.
- Controlling shareholders – ‘comply or explain’: The FCA has proposed modified rules requiring listed companies either to conclude a shareholder agreement with a controlling shareholder, or make specific disclosures and include risk factors in its prospectus and annual report (a ‘comply or explain’ approach - changes to an agreement would require a market notification). Failure to comply with the controlling shareholder regime would no longer mean ‘enhanced oversight’ of related party transactions (at present, non-compliance means the loss of related party transaction exemptions). Provisions on the election of independent directors would be retained.
- Significant transactions – no circular or shareholder vote required except for reverse takeovers: The FCA has proposed that shareholder approval on the basis of a circular would be compulsory only for a reverse takeover; current Class 1 transactions would be required only to make a market announcement (as presently required for Class 2 transactions). No requirements would apply below the 25% Class 1 threshold. Sponsor guidance should still be sought where a company is in doubt about the application of the rules, although no sponsor declaration will be required. The FCA is also proposing to remove the ‘profits test’ element of the classification rules and allow more scope to sponsors to modify the remaining tests. Additional requirements may apply for transactions undertaken by companies in financial difficulty; the FCA will outline proposals in this area in a later consultation paper.
- Related party transactions – no circular or shareholder vote required: Under the proposals shareholder approval would no longer be compulsory for a related party transaction (including those with a controlling shareholder). Instead for transactions over a 5% class test threshold companies would need to make an announcement with specified disclosures, including a statement that the transaction was fair and reasonable as far as the security holders of the company were concerned and that the company had been so advised by a sponsor. Companies will need to obtain the guidance of a sponsor when proposing to enter into a transaction that is or may be a related party transaction.
The current proposal is that a modified sponsor regime will apply to the new single listing category with sponsors required to provide assurances to the FCA at IPO. The FCA notes that sponsor due diligence on IPO would need to extend to take account of the new eligibility requirements for the single category, although it anticipates that post-listing the need for a sponsor to be appointed would be reduced (as noted above, the FCA is proposing sponsors will retain an advisory role on significant transactions and related party transactions - sponsors would also be required on transfers into the new single category). The FCA has indicated it may consider requiring a sponsor for its new listing category for SPACs (see below). The FCA will also consider requirements for secondary offers, including the role of a sponsor, as part of its work on the new public offers and admissions to trading regime.
The FCA has proposed amendments to its sponsor competence requirements (to include consideration of transactions that have not required a sponsor declaration). Consideration of changes to sponsor record keeping obligations will be included in a later consultation paper.
Other listing categories
In addition to the new single category for commercial company issuers of shares, the FCA has proposed a new separate category for SPACs. There will also be an ‘other shares’ category, which the FCA is considering making open to overseas incorporated issuers currently on the standard segment because their UK listing is a secondary listing. No material changes are proposed to the listing rules for non-equity securities.
The FCA proposes to ensure arrangements are in place to enable current premium and standard listed issuers of shares in commercial companies to transfer to the new single listing category, and SPACs to the new SPAC category, with remaining standard listed issuers of shares enabled to transfer to the new ‘other shares’ category. While the FCA’s expectation is that existing standard listed issuers of equity shares that are commercial companies should transfer to the new single listing category, it will consider if such issuers that are not willing or able to do so should be permitted to transfer to the other shares category, potentially on a time limited basis.
The consultation closes on 28 June 2023, and the FCA has indicated it is keen to engage with market participants during this consultation period. The FCA expects to bring forward draft handbook rules and wider proposals on consequential and transitional issues in autumn 2023, and is aiming for an accelerated timetable in 2023 for the reforms.