UKLR: Key changes for the sponsor role in the commercial companies category

As part of our series on the changes to the London listing regime brought in by the new UK Listing Rules (UKLRs), this blog looks at the impact of the reforms on sponsors. The FCA has already made changes to the sponsor competence requirements, which came into effect in April 2024, but how do the most recent wider changes to the listing regime affect the sponsor role?

Scope of sponsor regime

The FCA continues to believe the role of sponsors to be important and beneficial to the FCA, issuers and investors, and views sponsors as an integral component of its reforms. In particular, the sponsor regime helps to ensure that a company is supported and receives high-quality expert advice before and after listing as well as helping to safeguard market integrity and protect investors. The role of sponsors becomes even more important in the context of the wider variety of issuers that are able to list in the new commercial companies category. The FCA has also noted that the sponsor regime is not intended to result in zero failure of issuers’ business models but rather to ensure issuers are able to meet their listing obligations, especially around governance and disclosure, which allows investors to make well-informed investment decisions.

Under the former listing rule regime, a sponsor was only required on the premium segment; the UKLRs will continue to apply the sponsor regime to the commercial companies and closed-ended investment fund categories that have replaced the premium segment. In a new step, however, the sponsor regime will now also be required in the new category for shell companies. As formerly on the standard segment, no sponsor is required for the international commercial companies secondary listing or transition categories, or for issuers of GDRs or debt securities.

This blog considers how the listing regime reforms impact the sponsor role in the commercial companies category.

Commercial companies category – sponsor role on IPOs

The role of the sponsor on an IPO remains broadly the same, although practical changes result from the more streamlined eligibility requirements that apply to the commercial companies category (outlined in this blog).

On an application for initial admission, alongside administrative forms, the sponsor will continue to be required to submit an eligibility letter and a sponsor declaration; it must also ensure that all matters known to it which, in its reasonable opinion, should be taken into account by the FCA in considering the application have been disclosed with sufficient prominence in the prospectus, or otherwise in writing to the FCA (the sufficient prominence disclosure requirement).

For the sponsor declaration on an IPO, a sponsor’s obligations remain substantially the same.  The sponsor must, after due and careful enquiry, confirm to the FCA that in its reasonable opinion relevant requirements have been satisfied and that the directors of the applicant have put in place procedures which enable it to comply with relevant requirements – and make proper judgements – on an ongoing basis. The sponsor declaration on IPO will sit alongside the new confirmation required from an issuer’s board on procedures, systems and controls (discussed further in this blog). Comfort from an issuer’s reporting accountants on financial position and prospects procedures (FPPP) will support both the sponsor declaration and the issuer board confirmation.

Whilst the sponsor declaration on an IPO still covers working capital, applicants seeking to list in the commercial companies category no longer have to satisfy the FCA that they have sufficient working capital for at least the 12 months following publication of the IPO prospectus. As a result, the sponsor is now only required to consider whether the directors have a reasonable basis on which to make the working capital statement that continues to be required in an IPO admission prospectus, regardless of whether that statement is confirming the sufficiency of the applicant’s working capital or otherwise. It is expected, therefore, that there will continue to be a role for back-to-back comfort from reporting accountants on an issuer’s working capital position.

A sponsor will, however, no longer need to assess whether historical financial information meets the revenue-earning track record requirements that formerly applied on the premium segment; the FCA has stated in the consultation process that it does not expect sponsors to ‘back fill’ eligibility requirements that have been removed from the UKLRs.  Where an applicant has a more limited track record, however, the FCA will still expect due and careful enquiry by the sponsor.  The FCA consultation on reform of the prospectus regime envisages a continuation of existing historical financial information, pro forma and ‘complex financial history’ requirements in an IPO admission prospectus. Sponsors may continue to obtain comfort from an issuer’s reporting accountants in these areas to support their confirmation of issuer compliance with relevant prospectus rules in addition to doing their own confirmatory work. 

Commercial companies category – sponsor role post-IPO

The ongoing role of the sponsor for companies listed in the commercial companies category is more targeted than on the premium segment.

• Significant transactions: A sponsor will no longer automatically be required for all significant transactions that reach a 25% threshold.  Issuers will need a sponsor only if they wish to make a request to the FCA to modify, waive or substitute a rule within the significant transaction regime, or if they wish to request individual FCA guidance.  No sponsor role applies in relation to the significant transaction notifications that replace the premium shareholder circular and shareholder approval requirements.
• Reverse takeovers: Reverse takeovers, acquisitions 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), will continue to require sponsor involvement.  Sponsor guidance must still be obtained to assess the application of relevant rules to any transaction that could be a reverse takeover; declarations will also be required in relation to a reverse takeover circular (satisfaction of circular requirements and no adverse impact on issuer’s ability to comply with relevant rules – the sufficient prominence disclosure requirement also applies) and in relation to any re-admission prospectus. 
• Related party transactions: The sponsor role is also reduced for related party transactions at the 5%+ threshold.  A sponsor will always be required to provide a ‘fair and reasonable’ confirmation but, as the new regime does not require shareholder approval or a shareholder circular, there is no other sponsor role unless the listed company wishes to make a request to the FCA for guidance, or a modification or waiver of the related party rules.
• Further issues of shares: A sponsor continues to be required for a further issue of shares that requires a prospectus. While at present the threshold for an admission prospectus for a further issue of shares is 20%, the FCA is consulting on raising this threshold to 75% (discussed further in this blog).  As on an initial admission, the sponsor must, alongside more administrative steps, submit a declaration (in similar form to on IPO, but limited to confirmation that the relevant requirements have been satisfied and that the directors have a reasonable basis on which to make any working capital statement included in the admission prospectus) and ensure the sufficient prominence disclosure requirement is met. 
• Transfer of listing category and modified transfer process: As previously for transfers into the premium segment, a transfer to the commercial companies category will require a sponsor to submit an eligibility letter and a sponsor declaration, and to ensure the sufficient prominence disclosure requirement is met. 

A modified transfer process will be available indefinitely to certain companies mapped to other categories that wish to transfer to the commercial companies category, for which a modified form of sponsor declaration is required. The FCA (in Primary Market Bulletin 48) has proposed a technical note to address the nature and extent of the work required to support this sponsor declaration, which focuses on incremental obligations applicable to the new category.  The declaration requires a negative confirmation that the sponsor has not identified any adverse information that would lead it to conclude that the issuer would not be able to comply with relevant obligations; in giving this assurance, a sponsor may make a rebuttable presumption that an issuer has complied with obligations relevant to its existing listing, unless information arises in the course of its work – including due diligence carried out for its own commercial and wider regulatory purposes – to indicate otherwise. If the sponsor identifies anything of concern, it should consider exploring the matter further and should take that information into account when making its declaration.  A sponsor is not, however, required to undertake any additional work to identify risks or concerns in the first place.

Issuer obligations to a sponsor

The role of a sponsor is not always well-understood by issuers.  This can lead to additional cost and friction if, for example, a sponsor requires additional reporting or documentation as part of its due diligence.

The UKLRs emphasise the responsibilities of listed companies under the sponsor regime, including issuer obligations in a separate chapter (UKLR 4).  The chapter provides new guidance on the required cooperation of a listed company with its sponsor, noting sponsor confirmations may relate to work the listed company undertook before a sponsor was appointed, and encourages listed companies to engage with a sponsor at the earliest possible stage if in doubt about the application of relevant requirements. 

The FCA also intends to write to the boards of issuers at the outset of an IPO to explain its expectations of interactions between the issuer and its sponsor.  The FCA will clarify that the sponsor is assisting the FCA in carrying out its functions, that sponsors are closely supervised and that a sponsor must be able to demonstrate, through its own records, that it has exercised due care and skill and provided opinions after due and careful enquiry.  The FCA hopes this will support sponsors and clarify for issuers the distinction between sponsors and their other advisers.

Updated rules and proposed guidance for sponsors

• Record-keeping: In response to feedback the FCA has proposed (in Primary Market Bulletin 50) an update to its existing record keeping technical note TN/717 to include a new appendix of Q&A.  While the FCA is clear it cannot specify the precise records that will be reasonable in all cases, it has sought to include in the Q&A a sense of its reasonable expectations, practical considerations and examples. 

In addition the UKLRs update guidance (now found at UKLR 24.4.27G) on the matters the FCA takes into account when considering the sufficiency of sponsor records: while formerly records were expected to allow a person with no specific knowledge of the relevant sponsor service to understand and verify the basis upon which material judgements were made, it is now sufficient if they would do so for a person with a basic understanding of the transaction.  The FCA expects this change to limit the records required, noting in particular that a sponsor will not be required to retain records relating to matters of public record.

• Sponsor due diligence: The FCA (in Primary Market Bulletin 48) is consulting on changes to a number of sponsor technical notes to clarify its expectations. Proposed changes to existing technical notes (including those covering working capital confirmations, uncertain market conditions, FPPP, established procedures and no adverse impact) seek to clarify that sponsors should not presume a report from a third-party expert is required in all circumstances or that, where such a report exists, the sponsor must always challenge its contents (challenge is only required where appropriate). 

The FCA has also responded to concerns raised by sponsors about the sponsor’s role coordinating due diligence in specialist areas by proposing (in Primary Market Bulletin 50) a new technical note (TN/722) to provide guidance on its reasonable expectations.  While a sponsor is expected to apply relevant rules – the UKLRs, the prospectus rules, the UK MAR disclosure requirements and the DTR transparency rules – with skill and expertise in the specific context of an issuer’s business and operations, the FCA does not expect sponsors to be experts in every specialist discipline.  It is within the judgement of a sponsor to determine when specialist reporting by a third party – such as an accounting, environmental or other expert – is appropriate: the FCA does not expect to see third party reports where a sponsor is able to form its judgement without independent reporting, nor does it need to see evidence of challenge where a sponsor is satisfied with the comfort a report provides (the FCA suggests a brief contemporaneous note of any such judgement and its basis would be sufficient). 

• Supervisory reviews of sponsor services: The FCA has also taken steps to allay concerns from sponsors that its supervisory reviews have led to a disproportionate increase in the compliance burdens borne by sponsors and proposed (in Primary Market Bulletin 50) a new technical note (TN/723) to explain its approach.  The new note explains how and why reviews are undertaken, as well as how the FCA provides feedback and what it expects in response; the FCA hopes this will encourage communication from sponsors where they believe feedback is inaccurate or unfair and also lead to proportionate responses to feedback (for example where changes to procedures or controls are involved).
• Principles for sponsors: The FCA has made minor clarifications to the principles for sponsors, making the existing principle requiring a sponsor to act with honesty and integrity in relation to a sponsor service into a standalone principle (UKLR 24.2.7R); this change emphasises it has a broad application and does not relate only to engagement with the FCA.
• Sponsor declarations: In a helpful move, the FCA has also, in response to feedback, amended its sponsor forms to express clearly that they are signed on behalf of the sponsor firm, and not in any individual capacity. 

What comes next?

The FCA has stated its aim of meeting with the most active sponsors at least twice a year and periodically with other firms, and anticipates meeting all sponsors in the coming months to maintain a dialogue around the listing regime reforms. 

The UKLRs are now in force (from 29 July 2024), subject to transitional provisions.  To aid navigation of the new rules we have prepared a table that tracks the application of each chapter of the UKLRs and the most substantive equivalent under the former listing rules.

The FCA continues to update its Knowledge Base to reflect the UKLRs (see Primary Market Bulletin 48 and Primary Market Bulletin 50).  These and further changes are expected to be finalised in the coming months.  Comments on the sponsor technical notes proposed in Primary Market Bulletin 50 remain open until 5 September 2024.

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 (discussed further in this blog).

For more information on the listing regime changes please get in touch with your usual Freshfields capital markets contact.