As part of our series on the changes to the London listing regime brought in by the new UK Listing Rules (UKLR), this blog looks at the changes made by the reforms that will impact applicants looking to IPO.
Eligibility requirements
IPO candidates for the commercial companies category in London will benefit from both slimmed down eligibility requirements and more focused continuing obligations, in keeping with the shift to a more disclosure-based regime and in line with other major exchanges. The eligibility changes for the commercial companies category are discussed below; a future blog on key changes for existing premium listed companies will cover the impact of the reforms on continuing obligations.
Track record and working capital
Applicants to the commercial companies category are not required to meet any specific track record or working capital requirements.
The former premium listing track record requirement (for historical financial information supporting a three year revenue earning track record for at least 75% of an applicant’s business) has been removed, although an IPO prospectus continues to require historical financial information for three years, or such shorter period as the issuer has been in operation. ‘Complex financial history’ rules may also apply and require additional financial disclosure in a prospectus where, for example, the company has made acquisitions or disposals. The FCA plans to consult on reform to the prospectus regime in the summer of 2024, but these disclosure requirements are not currently expected to change for IPO candidates.
The premium listing requirement that an applicant satisfy the FCA that its group has sufficient working capital for 12 months from the date of its IPO prospectus has also been removed. A working capital statement is still required in an IPO prospectus, however, and although qualifications to that statement are permitted it is likely an ‘unqualified’ or ‘clean’ working capital statement will still be commercially desirable to facilitate marketing of an offer to prospective investors. Again, it is not currently expected that upcoming prospectus regime reform will make changes in this area for IPO candidates.
Independence and control of business
The commercial companies category removes the former premium requirement that an applicant exercise operational control over its business. The FCA intends the new category to be sufficiently flexible to accommodate issuers with diverse business models and potentially more complex corporate structures – for example holding companies with minority investments and franchise models. The requirement for an applicant to demonstrate that it can carry on an independent business as its main activity is also removed for most applicants, and will now apply only to those with a controlling shareholder (30%+).
Controlling shareholders
The commercial companies category retains the controlling shareholder regime in an amended form.
In contrast to the premium segment, companies with a controlling shareholder on the commercial companies category are not required to put in place a relationship agreement with specified independence provisions; instead, if a director considers that a shareholder resolution proposed by a controlling shareholder or its associate is intended (or appears to be intended) to circumvent the proper application of the UKLR, the circular accompanying that resolution must include a board statement of that director’s opinion. The FCA suggests, in our view helpfully, that relationship agreements continue to be a feature of the London market on a voluntary basis, as has been the case to date for significant shareholders below the controlling shareholder threshold.
Other aspects of the regime will continue: dual-voting for the election of independent directors and a vote to cancel or transfer out of a listing on the commercial companies category, specified annual report disclosures and compliance with independent business requirements.
Dual class shares structures
Applicants to the premium segment were limited in the form of ‘dual class share structures’ (DCSS) they could offer to founders wishing to retain enhanced voting power post-admission. While the commercial companies category retains some restrictions on the nature of DCSS, it is a more flexible regime designed to allow the market – as it has to date on the standard segment – to determine key features.
On the premium segment, enhanced voting rights could be held by directors only, for a maximum period of five years and with a maximum weighted voting ratio of 20:1. In addition, unless there had been a change of control, the enhanced rights could be used only on a vote to remove the holder as a director. On the commercial companies category, in contrast, there is no limit on the maximum weighted voting ratio and rights can be issued to a wider range of holders. Enhanced voting rights can be held without an expiry date by natural persons who were, at IPO, directors, shareholders, investors or employees (or a relevant vehicle – economic transfers will be permitted, but the exercise of enhanced voting rights will be limited to the original recipient). In a key change from the draft rules published in March, institutional investors at IPO can hold enhanced voting rights, though subject to a maximum period of 10 years post-IPO.
Enhanced voting will be permitted, at all times, on a wide range of votes, with only targeted exclusions to protect minority rights. This means enhanced voting will not apply on votes to approve a cancellation or transfer of listing, the approval of employee share schemes, long-term incentive plans or discounted option arrangements, the approval of secondary offers with a discount in excess of 10% or certain share buybacks.
Free float and market capitalisation
No changes are being made to the requirement for a minimum market capitalisation of £30 million or for a free float of 10%. These requirements were modified on the premium segment at an earlier stage of the FCA’s reform process and are carried over to the commercial companies category in that amended form.
FTSE index eligibility
The commercial companies and closed-ended investment fund categories will replace premium in the FTSE UK Index Series. FTSE is not introducing any additional inclusion requirements that would replicate deleted premium listing requirements. Updated FTSE UK Index Series Ground Rules will be published on 26 July 2024.
What comes next?
The UKLR apply from 29 July 2024, subject to application of transitional provisions. To aid navigation of the new rules we have prepared a table that tracks the application of each chapter of the UKLR and the most substantive equivalent under the former listing rules.
The FCA continues to update its Knowledge Base to reflect the UKLR (see Primary Market Bulletin 48 and Primary Market Bulletin 50). These and further changes are expected to be finalised in the coming months.
As noted above, FTSE will publish updated FTSE UK Index Series Ground Rules to reflect the impact of the listing regime reforms on 26 July 2024.
And in the connected area of prospectus reform, the FCA plans to publish consultation proposals on the new public offers and admissions to trading regime in summer 2024.
For more information on the listing regime changes please get in touch with your usual Freshfields capital markets contact.
