The FCA has today published its eagerly awaited new UK listing rules (see PS24/6). These changes represent the most significant reform of the UK listing regime for decades and a key step in the process of modernising the UK equity capital markets kicked-off by the Hill Review back in 2021.
Although the new rules have been a long time coming, they will now be implemented rapidly, coming into effect on 29 July 2024 (subject to certain transitional provisions). This means they will be in place before the start of the Autumn IPO window.
In our view, the changes should result in a more internationally competitive regime with the potential to encourage listings by a more diverse range of companies, and the FCA should be given credit for seizing the opportunity to effect meaningful reform and reinforce London's position as a global listing venue of choice.
However, as has been widely recognised, while updating the listing regime is part of the debate, it will not necessarily (in and of itself) result in more UK IPOs. A number of broader considerations, including valuation dynamics and investor/analyst depth and expertise, remain key to companies' decisions on where to list. Any future demand side reforms, such as additional measures to promote greater investment by pension and insurance funds in UK listed equities, would also be likely to have an impact.
We will be publishing more detailed briefings on the new listing regime in due course, but in the meantime have highlighted some key takeaways below.
Is the shareholder vote requirement for significant and related party transactions being removed?
As outlined in the FCA's December 2023 consultation, shareholder approval will not be required for significant or related party transactions by companies in the new equity shares in commercial companies (ESCC) category (other than reverse takeovers).
Following feedback, the FCA has made significant changes to its previous proposals for transactions by closed-ended investment funds so that the approach is more closely aligned with that for commercial companies. As such, a shareholder vote will not generally be required for significant and related party transactions by funds (other than reverse takeovers outside the scope of the investment policy). However, additional requirements will apply to changes to the investment manager's fees or other remuneration – this will require a sponsor fair and reasonable opinion at 0.25%+ and a shareholder vote (and related circular) for changes of 5%+ (as well as uncapped fees)
As also proposed in the December consultation, the profits test is being removed from the class tests (based on feedback and the FCA's own experience that it frequently produces anomalous results) and the related party definition is being amended to increase the threshold at which a shareholder becomes a related party to 20% (from the current 10%).
Whilst the final regime largely follows the position outlined in the FCA's December 2023 consultation, there are some material differences in the final rules.
For companies in the ESCC category, the key changes compared to the position in the consultation are:
- Adjusting the announcement requirements for significant transactions to give issuers the ability to make staged disclosure with certain information disclosed as soon as possible once the transaction terms are agreed and other information notified subsequently (and in any event no later than completion of the transaction). A more streamlined approach has also been taken to the announcement contents (including, for acquisitions, removing the requirements around historic financial information).
- Changes to the rules applicable to companies with controlling shareholders – in particular, removing the requirement to have a relationship agreement in place. Companies will still need to be able to carry on business independently from any controlling shareholder (although some of the guidance in relation to this requirement has been amended) and the rules on election and re-election of independent directors (as well as the additional shareholder vote requirements in relation to de-listing) will continue to apply.
- Introducing greater flexibility in relation to dual-class share structures by permitting these to be held by pre-IPO investors that are legal persons as well as individuals (although where held by legal persons they will be subject to a maximum 10 year sunset provision).
Key changes for other companies compared to the position in the consultation include:
- The changes to the rules on significant and related party transactions by closed-ended investment funds mentioned above.
- Amendments to the shell companies category to broadly revert to the rules that currently apply to such issuers in the standard listing category (including a guidance approach in relation to investor protections that special purpose acquisition companies can choose to put in place to avoid a presumption of suspension). However, there will be time limits within which an initial transaction must be undertaken and the sponsor regime will apply to the new category.
In March 2024 FTSE Russell indicated it was anticipating that, shortly after the introduction of the new regime, the ESCC and closed-ended investment fund categories would replace the premium segment as the eligible universe for the FTSE UK Index Series. However, it was noted that this position was not final and all further announcements by the FCA would be closely considered prior to any changes to the index eligibility criteria being confirmed.
At the time of writing, FTSE Russell has not yet published an update on its position in light of PS24/6, although we expect it to do so in due course.
The FCA has been in correspondence with issuers in recent months to confirm their new category when the revised rules come into force. In summary, for issuers of equity shares, this will mean that:
- Existing premium listed commercial companies transfer to the ESCC category.
- Existing premium listed funds transfer to the closed-ended investment funds category.
- Existing standard listed equity share issuers transfer to either the transition category, the international commercial companies secondary listing category, or the shell companies category (as appropriate).
The transition category is a legacy category based on current standard listing requirements which will be closed to new entrants. An expedited process is available for companies in this category to move to an ESCC listing if they want to do so (provided they are eligible).
The international commercial companies secondary listing category is for equity shares of non-UK incorporated companies that also have shares of the same class admitted to an overseas market. It is largely based on current standard listing requirements but with an overlay of additional rules relating primarily to the non-UK market on which the issuer's shares are traded and its ongoing compliance with the applicable overseas rules.
In the FCA's press release relating to the new rules, Sarah Pritchard, Executive Director, Markets and International, at the FCA said: 'A thriving capital market is vital in delivering investment to growing companies plus returns and choice to investors. That's why we are acting to make it more straightforward for those seeking to list in the UK, while retaining vital protections so investors can help steer the businesses they co-own. 'Regulation is only part of the answer in helping the UK achieve sustainable growth. Other factors also play a significant role in influencing where a company decides to list. We're committed to continually working together with all those who have a part to play in supporting a thriving UK capital market and thank everyone who has contributed to this work so far.'
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