Recalibrating the rule book – FCA publishes final proposals

The FCA has published CP23/31: Primary Markets Effectiveness Review: Feedback to CP23/10 and detailed proposals for listing rules reforms, outlining next steps for its proposal to replace the current premium and standard listed share categories with a new disclosure-based regime.

The proposals set out plans for a new single segment for commercial companies with or seeking a new ‘primary’ equity share listing in the UK, alongside separate categories for shell companies and non-UK companies with a primary listing outside the UK.  The changes will see the current listing rules replaced with a new set of UK Listing Rules (the UKLR).

CP23/31 contains the first tranche of proposed detailed rules, focused primarily on the new commercial companies category, with the remainder to follow in Q1 2024.  The FCA has requested comments on the majority of the changes by 22 March 2024. The FCA aims to publish the final UKLR via a policy statement at the start of H2 2024, with only a two-week period between that publication and implementation of the new regime.  The FCA will implement certain changes to sponsor competence requirements sooner, and has asked for comments on these changes by 16 February 2024.

We outline key changes for commercial companies below.  

Commercial companies

• Track record and ‘clean’ working capital requirements: In line with its earlier consultation in CP23/10, the FCA proposes that eligibility rules will no longer require a three-year financial and revenue earning track record or a ‘clean’ working capital statement (prospectus financial history and working capital disclosures will be required).
   
• Independent business and control of business rules: Other than for companies with a controlling shareholder (see below) the FCA proposes not to have eligibility and continuing obligations requiring that a company has an independent business and operational control over its main activities.
   
• Controlling shareholder regime: The FCA has decided to retain the current controlling shareholder regime for premium listed companies, including a requirement for issuers to demonstrate the ability to carry on their main business activity independently and for a written and legally binding relationship agreement with the controlling shareholder.
   
• Dual-class share structures (DCSS): In response to feedback, the FCA has decided not to impose a maximum sunset-period on DCSS in favour of allowing market practice to determine an appropriate period.  The FCA has also widened the category of persons eligible to hold enhanced voting rights to include not only directors but also natural persons who are investors/shareholders or employees (or a relevant vehicle).  The proposals allow economic transfers but restrict exercise of the enhanced voting rights to the original recipient.  Holders of enhanced voting rights will not be permitted to use those rights on a vote to approve a cancellation or transfer of listing, the approval of an employee share scheme, long-term incentive plan or discounted option arrangement, the approval of a secondary offer with a discount in excess of 10% or certain share buy-backs.  Enhanced voting rights will be permitted in relation to a reverse takeover and, where there is a controlling shareholder, the election or re-election of any independent director (the FCA views the existing double majority requirement as sufficient protection).
   
• Significant transactions: The FCA proposals remain for a disclosure-based regime for transactions at the current Class 1 threshold (25%), with no requirement for prior shareholder approval, and no specific notification requirements for transactions at the current Class 2 threshold.  The changes are aimed at making UK listed issuers more competitive and agile: the FCA notes current rules result in UK listed issuers paying a premium when participating in competitive M&A, or preclude their consideration as bidders.  Following feedback, the FCA has enhanced the disclosures required as part of a significant transaction announcement to include:
  • an enhanced version of the current Class 2 disclosures; and
  • certain elements of the financial information required for Class 1 circulars. This includes two years of audited financial information on the target, where available – or an explanation of how the agreed price was determined, and a statement the board considers it to be fair as far as the security holders of the company are concerned – and a statement of the effect of the transaction on the group’s earnings, assets and liabilities. Target financial information need not be presented on a basis consistent with the accounting policies of the listed company and no third-party opinions, working capital statement or pro forma financial information to prospectus standards would be required.  The FCA does not propose including requirements relating to profit forecasts or estimates

The FCA also proposes to provide new guidance on the scope of the ‘ordinary course of business’ exemption and to simplify the aggregation rules.  Sponsor appointment on a significant transaction will not be mandatory, nor will sponsors be required to give a declaration, be involved in producing the required disclosures or otherwise provide guidance where a transaction may be a significant transaction.  A sponsor will be required, however, if an issuer wishes to obtain individual guidance from the FCA or seeks a waiver or modification of requirements, including the class tests. 

The same provisions will apply to significant transactions undertaken by companies facing financial difficulty. Therefore, in a change from current rules for a reconstruction or refinancing no working capital statement will be required.

• Reverse takeovers: The proposals substantively retain the current premium listing requirements for a circular, prior shareholder approval and sponsor involvement.  The FCA will also retain the presumption of cancellation of listing on completion (for a target not already listed in the same category).
   
• Related party transactions: The FCA is continuing with a disclosure-based approach and will not require a shareholder vote.  The new regime will require that related party transactions that meet a 5% threshold be approved by the board (excluding conflicted directors) and an announcement made by the listed company (including a ‘fair and reasonable’ statement from the board referring to written confirmation from a sponsor).  The proposals also helpfully plan to remove duplication by specifying that the DTR 7.3 related party transaction regime will not apply to companies on the commercial companies category.  An issuer will not be required to seek the guidance of a sponsor when it enters into a transaction that may be a related party transaction. 

The FCA also plans to increase the threshold for a substantial shareholder to be a related party from 10% to 20%, as well as providing guidance on the ‘ordinary course of business’ exemption and the aggregation rules.  The FCA is also seeking views on whether to replace its existing definition of a related party transaction with that used in UK-adopted IFRS (as in current DTR 7.3).

• Other categories: In addition to the new commercial companies category, the FCA proposes a separate category for non-equity or non-voting shares, and the following:
  • Secondary listing for commercial company shares in non-UK companies: This will be a new category into which eligible issuers can move on implementation of the new regime, and will remain open to new applicants going forward. This category will replicate current standard listing provisions, in addition to which certain new eligibility and ongoing requirements will apply. These include that an applicant be non-UK incorporated and have equity admitted to trading on a relevant overseas market (without exceptions or carve-outs applying to a foreign issuer), as well as that its place of central management and control be either in its country of incorporation or primary place of listing.
  • SPAC / shell company: This category will build on the existing standard listing requirements and add in investor protections around the period in which an initial transaction must be undertaken (or the company wound-up) and the ring-fencing of public shareholder monies.  The sponsor regime will be extended to this category.  Specific obligations will apply to an ‘initial transaction’ by shell companies, following which an application for re-admission will need to be made to another category.
  • Transition (for current standard ‘primary’ listings of commercial company shares): This category will maintain the status quo for existing standard issuers, with no sponsor requirement.  Although this category as proposed would have no set end date, it would be closed to new applicants and may be closed over time if issuers transfer out (a modified transfer process will be available).  An issuer undertaking a reverse takeover will be required to re-apply for admission on a different, open, category.

The consultation paper contains detail on a number of other areas, including amendments to the listing principles (where a new board declaration will be required on IPO in relation to systems and controls), FCA proposals to strengthen co-operation and information gathering (although no new eligibility or continuing obligation is now proposed) and how ‘in flight’ matters will be dealt with at the outset of the new regime.  Provisions on suspensions, cancellations and transfers are broadly proposed to be carried across to the new categories.

Sponsors

The FCA proposes to apply the sponsor regime to the new commercial companies category (and those transitioning to that category), the closed-ended investment fund category and to SPACs/shell companies. 

The sponsor role at admission would remain largely unchanged, although changes to eligibility requirements may result in adjustments to due diligence; the FCA notes the sponsor will still have a role in undertaking reasonable enquiries on an applicant’s prospectus (including the working capital statement and historical financial information).  Post-IPO, sponsor support will be more targeted, but is expected on further increases in the issuer’s listed share capital if an FCA-approved prospectus is required (this will be explored more in the FCA’s work on the new public offers and admissions to trading regime), related party transaction fair and reasonable opinions and reverse takeovers. The FCA does not plan to change its rules on record-keeping, but does plan further guidance on its supervisory approach and expectations.

The FCA also plans changes to sponsor competence requirements, which will come into force in advance of the other proposed changes, to reflect the way it will assess competence reflecting the impact of the proposed reforms.