On December 20, 2023, the FCA published Consultation Paper CP23/31 setting out detailed proposals for the reform of the UK listing regime. This follows on from the blueprint contained in its previous consultation (CP 23/10) published in May 2023.
The proposals confirm a radical overhaul of the current rules by the FCA with a marked shift towards a more disclosure-based framework, reflecting its underlying intention of encouraging a more diverse range of issuers to list on UK markets (and to do so at an earlier stage) whilst providing investors with sufficient information to be able to exercise stewardship and other shareholder rights so as to influence company behavior.
In this briefing, we consider the key requirements for the new equity shares in commercial companies (ESCC) category, some of the main changes from the position outlined in the previous consultation, and the transitional provisions the FCA intends to apply to existing premium-listed commercial companies and standard-listed share issuers.1
The consultation closes on March 22, 2024 with feedback and final rules expected in summer 2024. It is intended that the final rules would come into force two weeks after they are published.2
ESCC: Key changes
Whilst the approach set out in the consultation is largely consistent with that proposed previously, certain changes have been made in response to feedback. There is also now greater clarity on the detail in a number of areas, and draft rules have been published for the new ESCC category.
Key changes from the position outlined in the FCA’s previous consultation include:
- Removal of eligibility requirements in relation to independence/control of business: Previously the FCA had suggested that these would be modified, rather than being removed in their entirety.
- Greater disclosure in respect of significant transactions: As proposed, with the exception of reverse takeovers, significant transactions (for example those that represent 25%+ on any class test) will not require shareholder approval, although a more prescriptive disclosure-based approach is now envisaged. Whilst this enhanced disclosure remains significantly less onerous than current Class 1 requirements, it represents a material shift from the FCA’s previous proposal of disclosure in line with existing Class 2 rules.
In particular, the announcement would need to include certain elements of the financial information currently required for Class 1 circulars (albeit with historic financial information only required for two years rather than three). Where the necessary historic financial information is not available, or not available to the standard required, the issuer would instead be required to provide an explanation of how it has arrived at the price agreed for the acquisition/disposal and a statement that the board considers it to be fair so far as the company’s security holders are concerned. - New guidance on ordinary course transactions: Additional guidance is proposed for both significant and related party transactions as to when a transaction would be treated as within the ordinary course of business (and therefore outside the scope of the regimes).
- DTR7.3 related party regime would not apply: It is no longer proposed that companies in the ESCC category would also need to comply with the separate related party requirements of DTR7.3.
- Changes to the definition of related party: The FCA proposes to increase the threshold at which a shareholder becomes a related party to 20% to address feedback that the current 10% threshold is too low (in terms of ability of shareholders to influence). More generally, the FCA has indicated it welcomes further views on whether, in the alternative, it should consider moving away from a bespoke definition of a related party and instead use the accounting definition as per DTR7.3.
- A more prescriptive approach for companies with controlling shareholders: Companies would still be required to demonstrate an ability to carry on their business independently of any controlling shareholder and to have a written relationship agreement in place. This differs from the position in the FCA’s previous consultation which proposed a “comply or explain” approach. The requirements in relation to the election and re-election of independent directors for companies with a controlling shareholder would continue to apply.
- A more permissive approach to dual-class share structures: Whilst the approach here is broadly in line with the previous consultation, changes include removing mandated sunset clauses (10 years was previously proposed by the FCA) and permitting a slightly broader range of persons beyond directors to hold weighted voting rights shares provided they have involvement or a stake in the issuer at the point of listing (for example, investors/shareholders or employees).
ESCC: Overview of key requirements
The table below includes a high-level comparison of key requirements for the proposed ESCC category and those applicable to a current premium commercial company listing.
| Eligibility | ESCC category | Premium listing |
|---|---|---|
| Minimum track record requirements | No | Yes |
| Clean working capital statement | No | Yes |
| Control of business | No | Yes |
| Independent business | No | Yes |
| Business independent of any controlling shareholder | Yes | Yes |
| Controlling shareholder agreement (if applicable) | Yes | Yes |
| Minimum free float (10%) | Yes | Yes |
| Minimum market capitalisation (£30m/$38m) | Yes | Yes |
| Pre-emption rights | Yes | Yes |
| Shareholder approval required for… | ||
| Significant transactions | No* | Yes |
| Related party transactions | No** | Yes |
| Reverse takeovers | Yes | Yes |
| De-listing+ | Yes | Yes |
| Sponsor appointment required for…++ | ||
| Initial admission to listing | Yes | Yes |
| Significant transactions | No | Yes |
| Related party transactions | If fair and reasonable opinion required | Yes |
| Reverse takeovers | Yes | Yes |
| Corporate governance | ||
| Comply or explain against UK Corporate Governance Code | Yes | Yes |
| Dual vote on election/re-election of independent directors (if there is a controlling shareholder) | Yes | Yes |
** Specific disclosure requirements (including the need for a “fair and reasonable” statement by the board having been so advised by the sponsor) would apply at 5%+ on any class test.
+ With specific additional requirements applying where the company has a controlling shareholder.
++ The circumstances in which issuers would be required to appoint a sponsor post-IPO would be significantly reduced for the new ESCC category. In addition to situations where a fair and reasonable confirmation is required in connection with a related party transaction, they would include certain transfers of listing category, reverse takeovers, requests to the FCA for individual guidance or for modifications of/derogations from the rules (including the class tests), and significant further share issues requiring an FCA-approved prospectus.
Transitional provisions for existing issuers
Premium-listed commercial companies
Existing premium-listed companies would automatically be mapped to the ESCC category when the new regime goes live.
Standard listed share issuers
Certain existing standard-listed commercial companies would be mapped by the FCA to a new “transition” category which would replicate existing standard-listing continuing obligations but be closed to new entrants. This category would not have a fixed end date, although the FCA notes that it may (subject to future consultation) seek to remove it in the medium-term as issuer numbers reduce. Issuers mapped to the “transition” category could choose to apply to transfer to the ESCC category – this would require the appointment of a sponsor, although the FCA proposes a targeted eligibility assessment and sponsor role for such transfers.
Mapping would also take place to move other existing standard-listed share issuers into the new “shell companies” category or the new “international secondary listing” category (designed for non-UK incorporated companies with more than one listing where the “primary” listing is on a non-UK market).
The FCA intends to contact issuers in advance of the prospective changes to notify them of the category it has proposed they will be mapped to.
Our thoughts
The consultation confirms the proposed radical overhaul of both eligibility and continuing requirements albeit, as discussed, the FCA has changed its approach in some areas in response to the feedback it has received.
That this feedback included a divergence of views between the buy-side and sell-side in relation to proposals for removal of the shareholder vote on significant and related party transactions is unsurprising. The enhanced disclosure regime included in the current consultation represents a pragmatic compromise in relation to significant transactions. It recognises the long-held concern that current shareholder approval requirements put UK premium-listed issuers at a material disadvantage to other prospective buyers (including those listed on international markets), while still providing transparency for investors.
In practice, we would expect companies to continue to engage with their major shareholders in relation to significant transactions notwithstanding the removal of the need for a shareholder vote. For related party transactions, the retention of a requirement for a sponsor-backed “fair and reasonable” confirmation at 5%+ represents an important safeguard for investors, notwithstanding the removal of the requirement for shareholder approval.
The enhanced disclosure regime … recognises the long-held concern that current shareholder approval requirements put UK premium-listed issuers at a material disadvantage to other prospective buyers.
The provision of greater clarity on transitional provisions will be welcomed by existing issuers. In particular, confirmation that the new “transition” category is not intended to be time-limited will give comfort to those existing standard-listed share issuers that would be unable (or unwilling) to transfer to the new ESCC category. In the case of existing premium listed issuers, automatic conversion to an ESCC listing makes sense, given that the requirements would be less onerous than the current rules. The fact that the FCA has given thought to the position of companies with a primary listing overseas is also positive, with the confirmation of a new, tailored, listing category for such issuers (albeit only where they are non-UK incorporated).
In our view, the proposals should result in a more internationally competitive regime, with the potential to encourage listings by a more diverse range of companies. It is positive that the FCA has seized the opportunity for effecting meaningful reform to reinforce London’s position as a global listing venue of choice, however this is only one aspect of improving the attractiveness of the UK’s capital markets.
As the FCA has noted previously, changes to its rules are part of the debate but will not necessarily (in and of themselves) result in more UK IPOs given that a number of broader considerations (including indexation, valuation dynamics and investor/analyst depth and expertise) remain key to companies’ decisions on where to list. In due course, whether the proposed regulatory changes are accompanied by demand side reforms, such as further measures to promote greater investment by UK pension and insurance funds in UK listed equities, could also be a material factor.
The reform of the listing regime was first kicked off by publication of the Hill Review back in spring 2021 – as such, these changes have been a long time coming. Whilst this may be unsurprising given the significance of the reforms ultimately proposed, it will be key for the new rules to be finalised and implemented swiftly in order for momentum to be maintained.
Footnotes
1 Whilst the draft rules appended to the consultation relate to the ESCC category, the consultation discusses in some detail the FCA’s proposed approach to other listing categories, including the new “shell companies” and “international secondary listing” categories as well as closed-ended investment funds. A second tranche of draft rules covering the non-ESCC listing categories is expected to be published in Q1 2024.
2 Proposed changes in relation to sponsor competence included in the consultation are subject to a shorter comment period (closing on 16 February 2024) – the FCA intends to implement these in spring 2024 and carry them over into the new regime.
Authors: Fiona Millington, partner; Clementine Hogarth, partner, Thomas Vita, partner; Alexander Green, counsel; Kathy MacDonald, head of corporate knowledge; Fay Stavrou, senior knowledge lawyer; based in London, Norton Rose Fulbright
