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 impact of the reforms on existing premium listed companies. What does the move from the premium listing segment to the commercial companies category mean for companies with an existing premium listing of shares?
Significant transactions
Perhaps the most important changes aim to increase deal certainty for companies carrying out significant transactions (formerly referred to as ‘Class 1’).
No shareholder approval
The commercial companies category streamlines the process for a transaction where any one class test ratio is 25% or more by moving to a disclosure-based regime. Transactions at this threshold will no longer require shareholder approval or an FCA-approved circular. This change aims to level the playing field for London listed companies pursuing an acquisitive strategy, removing a perceived disadvantage of the premium segment as against exchanges without an approval requirement. The new rules also remove the requirement to appoint a sponsor for all transactions at the 25% threshold, requiring sponsor input only if the listed company wishes to make a guidance or waiver request to the FCA.
Enhanced disclosure – (1) initial signing announcement
The trade-off for the removal of a compulsory shareholder vote is enhanced disclosure. A company listed on the commercial companies category must prepare a series of notifications to the market. This is an area in which the FCA has, in response to feedback, made helpful changes to its initial proposals. While it is still necessary for a listed company to make a first announcement at an early stage, when the terms of a proposed significant transaction are agreed, the content required at this stage is now limited, broadly, to an enhanced form of the announcement required previously for a Class 2 transaction.
The final rules also require this initial announcement to include any further information the listed company ‘considers relevant, having regard to the purpose’ of the significant transaction regime (also referred to as a ‘sweeper’ provision). The FCA acknowledged the strong criticism it received on the sweeper provision for being ambiguous in scope and creating uncertainty. However, the FCA considers it to be a useful reminder to listed companies to consider any further relevant information shareholders may require, while offering flexibility. It remains to be seen what the FCA will expect to be caught under this provision and how market practice will develop. A listed company should therefore carefully consider with its advisers, on a case-by-case basis, what further information should be notified, having regard to relevant circumstances and the information that its shareholders require to understand and assess the transaction and its impact on the company, in order to satisfy the overarching purpose of the significant transaction regime ‘to support engagement between the listed company and its shareholders and to enhance market transparency’.
(2) Further detailed announcement between signing and closing
A more detailed follow-up announcement is then required as soon as possible after terms are agreed and the listed company becomes, or ought reasonably to have become, aware of the required information, and at the latest by completion of the transaction. This second announcement includes a number of elements formerly included in a Class 1 circular but the final rules have removed some of the more onerous requirements. In particular, while the notification for all transactions must include specified non-financial information, target financial information is now only required for disposals. Removing the need for a London listed company to have financial information on an acquisition target should simplify participation in a competitive process.
Where target financial information for a disposal is not available the listed company must instead explain how the value of the consideration was determined, and include a board confirmation that the price is fair for its shareholders. While this is helpful, it remains to be seen how comfortable listed company boards will be in making such statements to the market and what comfort they will need.
(3) Completion notification
A final notification is required as soon as possible after completion, which must include a confirmation that (other than as disclosed) there has been no material change affecting any matter contained in an earlier announcement.
The UKLR do not retain the concept of a company in ‘severe financial difficulty’ as part of the significant transactions regime, but do contain guidance on disclosure for companies entering into a transaction to alleviate actual or anticipated financial difficulty.
Reverse takeovers
The commercial companies category continues the previous regime for acquisitions, referred to as ‘reverse takeovers’, where any class test ratio is 100% or more (or the transaction in substance results in a fundamental change in the business or in a change in board or voting control). Companies will still need to appoint a sponsor for any transaction that could be a reverse takeover and then make an announcement as soon as possible after terms are agreed, prepare an FCA-approved circular and obtain shareholder approval prior to completion. The FCA also continues to expect to cancel the admission of a listed company on completion other than in certain circumstances, such as where the target was listed on the same category, meaning a prospectus will still be required for the enlarged group to re-apply for admission.
Smaller transactions and aggregation
On the commercial companies category, no obligations apply at the former ‘Class 2’ threshold (on the premium segment a transaction was Class 2 if any class test ratio was at least 5%, requiring a prescribed announcement of key transaction details as soon as possible after terms were agreed). Companies should however consider their inside information disclosure obligations under the UK Market Abuse Regulation (UK MAR).
Smaller transactions completed during a rolling 12-month period will still need to be aggregated if, for example, they are entered into with the same person or with connected persons. Where the aggregated transactions meet the 25% threshold, a disclosure will be required either for the aggregated transactions as a whole, for individual transactions or for the latest transaction only, depending on the context. Where the reverse takeover threshold is met for aggregated transactions, disclosure requirements will apply in respect of the aggregated transactions as a whole but shareholder approval will be required only for the latest transaction.
Classification of transactions
The main change to classification is deletion of the profits test. The remaining class tests – consideration, gross capital and gross assets – are retained.
Break fees are newly excluded from the significant transaction regime, regardless of size (the premium segment required any such fee over 1% relative to the listed company’s market capitalisation or value to be treated as a Class 1 transaction). Exceptional indemnities that meet specified size criteria will continue to be within the regime. The new rules also introduce additional guidance on how the FCA will interpret the ‘ordinary course of business’ exemption.
Related party transactions
Similar changes apply to related party transactions, which again move to a disclosure-based approach.
Related party transactions where any one class test is 5% or more will no longer require shareholder approval or an FCA-approved circular. Instead, listed companies will be required to obtain written confirmation from a sponsor – before the transaction is entered into – that its proposed terms are fair and reasonable as far as security holders are concerned. A shortform announcement will then be required when terms are agreed, including a board fair and reasonable statement referring to that sponsor advice; this announcement must also include any further information the listed company considers relevant ‘having regard to the purpose’ of the related party transaction regime (a ‘sweeper provision’ similar to that for significant transactions). The sponsor role on a related party transaction will be reduced, although a sponsor will always be required for the fair and reasonable confirmation.
No specific requirements apply to related party transactions where the class tests are below 5% although, as for significant transactions, UK MAR disclosure requirements will continue to apply.
The new rules also increase the threshold for a shareholder to be a related party as a ‘substantial shareholder’ to 20% (from 10% on the premium segment) and update aggregation provisions to require disclosure on all aggregated transactions once the relevant threshold is reached. Guidance on the ‘ordinary course of business’ exemption is also included in substantially the same form as for the new significant transaction regime.
The UKLR also helpfully provide that companies on the commercial company category do not need to comply with the related party transaction requirements in DTR 7.3, avoiding the overlap of obligations that has applied on the premium segment.
Controlling shareholder regime
The controlling shareholder regime is retained, but with amendments.
Companies listed on the commercial companies category are no longer required to have in place a relationship agreement with a controlling shareholder (this is a change from the premium segment, which required an agreement with specified independence provisions). It is likely, however, that relationship agreements will 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. The termination provisions of existing agreements should be reviewed to ensure that agreements continue where appropriate/desirable.
In place of the relationship agreement requirement, the UKLR provide a new mechanism to hold controlling shareholders to account. 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 sanction of ‘enhanced oversight’ (the loss of all related party exemptions for transactions with the controlling shareholder or an associate) will no longer apply in the event of breach of a provision of the controlling shareholder regime. Other aspects of the regime will, however, 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, which now apply only to companies with controlling shareholders.
FTSE index eligibility
The commercial companies and closed-ended investment fund categories replace premium in the FTSE UK Index Series.
Other changes
Existing premium listed companies will no longer have to comply with either control of business requirements or, unless they have a controlling shareholder, with independent business requirements.
On dual class share structures, the commercial companies category is more permissive than the premium segment: in particular with no mandatory sunset date for enhanced voting rights held by individuals and no limit on the maximum weighted voting ratio. Institutional shareholders can now also hold enhanced voting shares with a 10-year sunset. Limited exclusions to the use of enhanced voting will be retained to protect certain minority rights (discussed further in this blog).
Companies should also be aware that the listing principles have been reformulated, albeit with minimal substantive changes for existing premium listed issuers. Although a new board confirmation will be required on an issuer’s first application for listing of securities, this is not a requirement on a further issue of shares. New administrative requirements will apply in relation to contact details and service of notices (discussed further in this blog).
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 has published updated FTSE UK Index Series Ground Rules to reflect the impact of the listing regime reforms.
And in the connected area of prospectus reform, the FCA has published consultation proposals on the new public offers and admissions to trading regime, which remain open for comments until 18 October 2024.
For more information on the listing regime changes please get in touch with your usual Freshfields capital markets contact.
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