UK Listing Reforms: Radical Reset To Take Effect On 29 July 2024

PS24/6: Primary Markets Effectiveness Review - Feedback to CP23/31 and final UK Listing Rules

Overview

On 11 July 2024 the FCA published PS24/6 (Primary Markets Effectiveness Review: Feedback to CP23/31 and final UK Listing Rules) confirming the final form of the changes to be made to the UK listing rules, representing the most significant reforms made to the regime for decades.

The FCA is proceeding largely as proposed in its consultation (CP 23/31) (Consultation) published in December 2023, although some changes have been made as discussed below.

The new rules will come into effect on 29 July 2024 (subject to certain transitional provisions) - so before the start of the autumn IPO window. The FCA notes that it will formally review the new regime in five years' time but will not hesitate to intervene earlier if necessary to ensure market integrity or its other statutory objectives.

This briefing focuses on the position for companies in the new equity shares in commercial companies (ESCC) category. We will be publishing a separate briefing on closed-ended investment funds shortly, but in the meantime a brief update on the position for funds can be found here.

Key changes to the proposals consulted on in December

Although the final regime largely follows the position outlined in the Consultation, there are some material differences in the final rules.

For companies in the ESCC category, the main changes from the Consultation relate to:

• The disclosure requirements for significant transactions (discussed further below).
• Amendments to the position for 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 of 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. If a controlling shareholder proposes a shareholder resolution which a director considers is (or appears to be) intended to circumvent the proper application of the Listing Rules, the board will be required to include an opinion statement on the relevant resolution in the circular.
• Introducing greater flexibility in relation to dual-class share structures by also permitting these to be held by pre-IPO investors that are not individuals (e.g. institutional or corporate investors). If held by such investors (rather than by individuals) the enhanced voting rights will be subject to a maximum 10-year sunset provision. The FCA notes this is a cap and not intended as an anchor point and that it expects it may still be the case that companies choose to set shorter sunset clauses below the 10-year maximum based on the views of investors.

For other categories, key differences include:

• Changes to the rules on significant and related party transactions by closed-ended investment funds. As mentioned above, we will be publishing a separate briefing on funds shortly, but in the meantime a brief update can be found here.
• 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 this listing category.

ESCC: Overview of key requirements

The table below includes a high-level comparison of key requirements for the ESCC category and those applicable to a current premium commercial company listing.

As can be seen, the new regime involves a marked shift towards a more disclosure-based framework than the current rules, both on IPO and post-listing.

In the context of significant and related party transactions, in addition to the removal of the need for a shareholder vote (other than for reverse takeovers) it is worth noting that, as proposed in the Consultation:

• The profits test is being removed from the class tests.
• The threshold at which a shareholder becomes a related party is being increased to 20% (from the current 10%).
• ESCC companies will no longer be required to also comply with the separate related party regime in DTR7.3.

Disclosure requirements for significant transactions by ESCC companies

As noted above, significant transactions by ESCC companies under the new rules will no longer require shareholder approval, but detailed disclosure must be made via RIS (a vote will, however, still be needed for reverse takeovers).

Under the new rules significant transactions are, in summary, those representing 25%+ on any class test and which are outside the ordinary course of business.¹ Guidance is included in the rules on the meaning of ordinary course in this context. As mentioned, the profits test has been removed as proposed in the Consultation. The FCA has also confirmed that break fees will not be treated as significant transactions in their own right under the new rules.

A summary of the key information required to be included in significant transaction announcements is set out below. The content requirements have been streamlined in a number of places compared to the Consultation (in particular the removal of specific financial information disclosure requirements for acquisitions) and the rules now also envisage the possibility of split disclosure, with certain information being announced on the transaction being entered into and further details disclosed subsequently – although, as currently, on initial announcement issuers will also need to ensure they comply with the disclosure requirements of the UK Market Abuse Regulation (UK MAR).

Supplementary notifications will be required prior to completion in certain circumstances (including where there is a material change to the terms of the transaction).

There are also specific disclosure requirements that apply where an announcement includes pro forma financial information or details of estimated synergies or other quantified estimated financial benefits expected to arise from the transaction.

For deals that fall below the significant transactions threshold, companies will need to carefully consider what information (if any) needs to be disclosed to the market, including in light of their obligations under UK MAR. This will vary depending on the specific circumstances and factors such as (among others) the materiality of the transaction to the listed group and the company's previous practice.

"Mid-flight" transactions

Where an existing premium listed issuer has a "mid-flight" transaction (i.e. one which was underway before 29 July 2024 but has not completed by that date), the FCA has adopted transitional provisions broadly as outlined in the Consultation. In summary these provide that requirements under the existing rules which are not carried forward into the new rules will cease to apply from 29 July but the new rules (including notification requirements) must generally be complied with in full.

In the case of significant and related party transactions, it is worth noting that where a circular has been published under the old rules, this will be treated as fulfilling the issuer's announcement obligations under the new rules. However, where a transaction has been announced but a circular has not been posted, a further announcement under the new rules will be required as soon as reasonably practicable after 29 July (and before the transaction closes) – in the case of a significant transaction this can take the form of a "top up" announcement that includes any required information which has not been previously notified together with a hyperlink to the previous announcement.

Transfer of existing issuers to new listing categories

Existing listed issuers will be transferred to the appropriate new listing category once the revised rules come into force. The FCA has been in correspondence with companies about this process in recent months to confirm the new category they will be mapped to.

For issuers of equity shares this will (in summary) mean being transferred as set out below.

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.

FTSE UK eligibility

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 that all further announcements by the FCA would be closely considered prior to any changes to the index eligibility criteria being confirmed.

Following publication of PS24/6, FTSE Russell has noted that it is reviewing the final rules and will provide an update shortly to confirm changes to the impacted index ground rules and eligibility criteria.

Our thoughts

Reform of the listing regime was first kicked off by publication of the Hill Review back in Spring 2021. As such, perhaps unsurprisingly given their significance, the changes have been a long time coming – although they will now be implemented in short order and before the all-important 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) yield 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 UK pension and insurance funds in UK listed equities, would also be likely to have an impact.

The changes also have the potential to positively impact M&A activity given the removal of the requirement for shareholder approval in relation to significant transactions. Whilst this has been one of the more controversial changes from a buy-side perspective (and, as such, a divergence of views has been expressed to the FCA, as recognised in the Policy Statement), it does address a long-held concern in the market that the current rules put UK premium listed issuers at a disadvantage to other prospective buyers, in particular in the context of competitive M&A processes. The removal of the profits test will also be welcomed by issuers – as the FCA has recognised, and consistent with our experience, it can often produce anomalous results.

Looking ahead from the listing rule changes, the next major milestone in the reform of the UK equity capital markets will be the introduction of the new prospectus regime. Although the statutory framework for this has already been put in place, a key FCA consultation is expected later this summer. Hopefully the FCA will again seize the opportunity to take a bold and ambitious approach when setting out its proposals in this area.

Footnotes

1 The definition also includes certain indemnities/similar arrangements and certain issues by major subsidiary undertakings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.