Shearman And Sterling

Royal Courts of Justice in London

March 08, 2021

UK Listing Regime Reform

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UK LISTING REGIME REFORM

A Major Overhaul of the UK’s Listing and Capital Markets Rules Proposed

On 3 March 2021, the Government published the U.K. Listing Review (the “Review”) following a consultation chaired by Lord Jonathan Hill, the U.K.’s last EU Commissioner and a former Government minister, into how, following Brexit, the existing U.K. listing regime could be reformed to attract more companies, particularly innovative technology and life sciences companies, to raise capital in London. The areas of reform proposed include dual class share structures in the premium listing segment, SPAC listings, free float requirements, rebranding of the standard listing segment and reform of the prospectus regime.

Summary

Context

Since Brexit, there has been a heightened focus on the challenges (as well as now the post-Brexit opportunities) facing London as a global capital markets hub and a recognition that London’s longstanding pre-eminence in the world’s global capital markets is under significant threat and indeed has been for some years.[1] In addition, London has clearly been losing out in attracting new technology and life sciences companies and new investment opportunities (in particular the listing of special purpose acquisition companies (SPACs)). Access hurdles to the U.K. capital markets and funding from them have been identified as problems requiring a more flexible approach to listing options and listing and prospectus requirements.

14 Recommendations

The Review makes 14 specific recommendations to address these challenges which cover changes to the FCA’s premium and standard segment listing rules (“relating to the plumbing of the system” in the Review’s words and on which the FCA will be asked to consult) and more general changes in relation to prospectuses (on which HM Treasury will need to consult) as well as longer-term areas for reform such as secondary capital raises and the greater empowerment of retail investors.

Closing the Gap, Rather Than Opening It

No doubt anticipating some of the reaction to its proposals, the Review is at pains to emphasise that its approach “is not about opening up a gap between [the U.K.] and other global centres by proposing radical new departures to try and seize a competitive advantage. It is about closing a gap which has opened up”.[2] Thus, looking at two of the more notable Review proposals, the dual class share structure (DCSS) proposal follows similar DCSSs allowed by Singapore and Hong Kong, and the SPAC proposal seeks to retain some degree of protection for investors while facilitating SPAC transactions in a way in which the current listing rules do not.

Another of the Review’s proposals – including, as a regulatory objective of the FCA, the attractiveness of the U.K. as a place in which to do business – aligns with the proposed return of the “U.K. competitiveness” objective for the FCA.[3] Taken with the rebooting of the U.K.’s listing rules proposed in the Review, these changes reflect the Government’s agenda of seeking to make the most of Brexit by implementing the right changes to make London an attractive venue for investors whilst at the same time maintaining globally respected high standards. This may go some way towards addressing some of the concerns that have been raised about the responsiveness of the FCA and, as the Review notes, the need for the FCA to have “proper resourcing and staffing” to enable it, in common with the financial regulators of London’s competing markets, to discharge its regulatory objectives and responsibilities in a more efficient and responsive way.[4]

Dual Class Share Structures

DCSS are fundamental to enabling founder control of newly listed companies but currently prevent those companies applying for a premium listing with the result that they must be listed on the less prestigious standard listing segment which precludes their inclusion in the FTSE U.K. indices. The Review proposes that they be eligible for a premium listing but subject to the super voting shares:

  • having a five-year limit on their super voting status; after the five-year limit, the issuer could either remain subject to the premium listing rules or switch to a standard listing with shareholder approval
  • having a maximum super voting ratio of 20:1 (in Hong Kong and Singapore this ratio is 10:1)
  • being held by an individual who is a director of the company
  • being subject to strict limits on transfer
  • having a strictly limited set of matters on which their super votes may be used—stopping a change of control and protecting their position as a director.

SPACs

Currently, SPAC listings in the U.K. are insignificant when compared to the US where, the Review notes,[5] in 2020 248 SPACs were listed raising £63.5 billion (US$83 billion) compared to just four in the U.K. raising £0.03 billion. In the absence of a U.K. SPAC market, U.K. target businesses have tended to become de-SPAC targets for US SPACs and increasingly SPACs listed on stock exchanges in the European Union, further reducing the pool of U.K. listed business. A major disincentive to a SPAC listing in the U.K. is that when it comes to make an acquisition, a suspension of its listing will generally be required unless detailed financial and other information on the target covering the last three years as well as certain declarations can be made or the target is listed or publicly traded.

Acknowledging the contentious debate around the investment rationale for SPACs, the Review proposes that the current listing suspension rule as it applies to SPACs (or SPACs of a certain minimum size) should be replaced with minimum disclosures that must be made when announcing the de-SPAC and rights for SPAC investors to vote on, and redeem their SPAC investment on, the acquisition taking place.

Free Float

The existing 25 percent minimum free float requirement (of an issuer’s shares in public hands) is widely seen as being a deterrent to many companies when considering a U.K. listing. The Review notes evidence that there is no significant reduction in post-IPO liquidity at free floats of less than 25 percent on other international markets.[6]

The Review proposes reducing the current 25 percent figure to 15 percent in both listing segments and also reducing the exclusions from investors who can be counted within the free float and allowing companies to use alternative measures to demonstrate sufficient liquidity in their shares after listing.

Prospectus Regime Reform

The Review calls for a fundamental review of the prospectus regime very much focused on making a prospectus a much more useful and less onerous document for investors to read and issuers to prepare, taking account of the type of issuance for which it is being used. Thus, proposals that should be considered include:

  • differentiating between the need for a full prospectus for public offers and possibly different listing documentation for an admission of shares to trading on a regulated market
  • recognizing that the full disclosure and reporting required by an IPO prospectus is not likely to be necessary or appropriate for a secondary offer by an established listed issuer and that in such cases considerably slimmed down prospectuses or even confirmation of there being no significant change to already disclosed market information might be the norm
  • prioritising within the Government’s Future Regulatory Framework Review a review by HM Treasury and the FCA of the on-shored Prospectus Regulation and also other listed company regulations (such as MAR and the Transparency Direction) to ensure that the regulatory framework fits better with the U.K.’s capital markets and the issuers making use of them.

The Review contains two other recommendations in connection with prospectus reform:

  • developing a broad “prospectus equivalence” regime to encourage secondary or dual listings in London on the basis of foreign approved prospectuses
  • reforming the liability regime for “forward-looking” statements made in a prospectus so that they no longer attract the same level of liability as do the other more backward-looking disclosures in the prospectus, although (to escape liability) directors would still need to demonstrate that they had exercised due care, skill and diligence and that they honestly believed the statement to be true when made.

Premium Listing Eligibility

Leaving aside DCSSs and the adjustments to the free float requirements, the Review recommends only two limited changes to premium listing eligibility. One is to broaden the application of the modification that the existing Listing Rules allow to the three-year track record requirement for scientific research-based companies so that it would also apply to other high-growth innovative companies.

The other proposed change is to amend the requirement that the three-year historical financial information that the issuer must have published must cover at least 75 percent of its business over those three years, so that this only applies to the issuer’s most recent financial period within the three years.

Rebranding of the Standard Listing Segment

The Review highlights the problems that the U.K.’s existing standard segment for listing has in attracting issuers, with its low profile and being overshadowed by the premium listing segment. It suggests that these need to be addressed by rebranding and better marketing of the segment, with the emphasis being on its flexibility in attracting a wide variety of companies which are not constrained to following the same prescribed standards but which can nevertheless develop their own voluntary governance and other standards.

These standards could develop over time into recommended best practices with investor groups being encouraged to develop their own guidelines which could assist in some standard listed companies eventually becoming eligible for index inclusion.

Reversing the FCA’s “Unconnected Analysts” Rules

In 2018, the FCA introduced rule changes that were designed to encourage more independent analyst research on companies coming to the market, but because of the continuing preference of most companies to brief their connected and unconnected analysts separately, the chief impact of the rule change has been to lengthen the IPO process by an extra seven days without very much more independent analyst research having been produced. The Review recommends that the FCA reassess the utility of this rule change.

Other Recommendations

The Review includes a number of other recommendations, including:

  • reviewing or expanding the remit of the FCA in relation to the attractiveness of the U.K.’s capital markets and specifically requiring it to take into account, as a regulatory objective, the overall attractiveness of the U.K. as a place to do business
  • the Chancellor of the Exchequer (the U.K.’s finance or treasury minister) to report annually to the U.K. Parliament on the steps that have been or are being taken to promote the U.K.’s capital markets, etc.
  • longer-term objectives such as consideration of how technology can be used to improve retail investor involvement in corporate actions and reviving the Rights Issue Review Group to consider how the efficiency of secondary capital raising by listed companies can be improved.

The Kalifa Review of UK Fintech

The Review follows hot on the heels of Ron Kalifa’s Review of U.K. Fintech which was published on 26 February 2021 and included in its 5 Point Plan, proposals for:

  • a reduction in free float requirements to 10% (rather than the Review's 15%, but for a limited period of time post-IPO) or alternatively putting in place a minimum free float threshold (such as NYSE and NASDAQ have)
  • allowing DCSSs in the premium listing segment
  • a longer-term relaxation in the institutionally supported disapplication of pre-emption rights similar to the 20% concession that the U.K. Pre-Emption Group allowed during the height of the pandemic from March to November 2020 (subject to appropriate periodic review)
  • the creation of a global family of new Fintech Indices to encourage and support investment in the sector.

Next Steps

The Review is addressed to the Chancellor, and it will be for HM Treasury and the FCA to respond and to take the recommendations and proposals forward by launching their own (or joint) consultations on these. In view of the urgency of the challenges, as well as the opportunities, that the Review has identified for the U.K.’s capital markets, we may expect to see some of these consultations starting within the next few months.

Predictably, some stakeholders have expressed concern about a possible downgrading of the high investor standards enjoyed by the U.K.’s capital markets if certain of the proposals are taken forward. The response of the Review to those concerns is to say that its proposals are not about tearing up regulation where it is needed and helpful and in line with the U.K.’s capital market competitors. Rather, the Review is an attempt to confront the challenges that the UK now faces as a financial centre when so many other capital markets are increasing their share of both equity listings and also listings of debt and funds (where issuers have a great deal of choice as to the venue of their listing). Having the best possible or highest standards is not, by itself, the answer to these challenges – as Lord Hill notes: “it makes no sense to have a theoretically perfect listing regime if in practice users increasingly choose other venues”.[7]

Footnotes

[1] The Review notes that between 2015 and 2020, London accounted for only 5 percent of IPOs globally and that the number of listed companies in the U.K. has fallen by about 40 percent from a recent peak in 2008 (p.1)
[2] P. 9 of the Review
[3]
HMT Financial Services Future Regulatory Framework Review – Phase II Consultation (see pp. 24-25)
[4] P. 6 of the Review
[5] P. 29 of the Review
[6] PP. 25 and 66 of the Review
[7] P. 2 of the Review

Authors and Contributors

Marwa Elborai

Partner

Capital Markets

+44 20 7655 5524

+44 20 7655 5524

London

Trevor Ingram

Partner

Capital Markets

+44 20 7655 5630

+44 20 7655 5630

London

Pawel J. Szaja

Partner

Capital Markets

+44 20 7655 5013

+44 20 7655 5013

London

Barnabas Reynolds

Partner

Financial Institutions Advisory & Financial Regulatory

+44 20 7655 5528

+44 20 7655 5528

London

Thomas Donegan

Partner

Financial Institutions Advisory & Financial Regulatory

+44 20 7655 5566

+44 20 7655 5566

London

Laurence Levy

Partner

Mergers & Acquisitions

+44 20 7655 5717

+44 20 7655 5717

London

Nick Withers

Partner

Mergers & Acquisitions

+44 20 7655 5956

+44 20 7655 5956

London

Michael Scargill

Counsel

Mergers & Acquisitions

+44 20 7655 5161

+44 20 7655 5161

London