On 3 May 2023, the FCA published its consultation CP23/10*** setting out revised "semi-final" proposals for its listing segments reform. These follow on from its discussion paper DP22/2 published a year ago, which itself followed the launch by the FCA of its primary markets effectiveness review (CP21/21***). The CP23/10 proposals are largely concerned with the listing of equity shares in commercial companies (the proposed "ESCC" listing segment). See Shearman's commentary on the DP22/2 proposals here.
The proposals incorporate feedback that the FCA received on DP22/2. Comments are requested by the FCA by 28 June 2023. The FCA is intending issuing a further consultation paper in the autumn which will include the text of the listing rule changes required to implement the changes and as it is aiming for an accelerated timetable, subject to transitional arrangements, we may expect to see the new listing regime coming into operation during 2024.
The big change in its proposals from those outlined in DP22/2 is the dropping of an optional additional tier of continuing obligations that equity issuers could have chosen to follow to if they wanted to align the investor protection rights their listing would offer, more closely with those currently provided by a premium listing. Many commentators on the DP22/2 proposals had doubts about the wisdom of this two tiered continuing obligations approach, since that seemed likely to result in the new listing segment being a "single" segment in name only if investors and index providers chose to treat those issuers opting into the additional set of obligations differently from those that stayed away from them. Now that the revised CP23/10 proposals apply a common set of continuing obligations to all issuers in the new single listing segment - obligations that are less onerous than those under a premium listing but significantly more demanding or prescriptive than those that apply to a standard listing - it will be interesting to see how much concern is expressed from the otherside of the premium v standard listing debate, in particular about the loss of the flexibility that a standard equity listing currently offers.
The CP23/10 proposals involve a mixture of very significant changes to existing premium and standard listing requirements, coupled with some refinements to those requirements. What follows focuses on the more significant changes that are proposed.
Key differences between an ESCC and a Premium Listing
The gateway eligibility conditions for an equity listing would be significantly eased by dropping the requirement for the issuer to have published audited financial information: (i) covering at least three years and representing at least 75% of its business during that period, and (ii) demonstrating the issuer's revenue-earning track record. In addition, by not requiring a "clean" (or unqualified) working capital statement, issuers will be spared the extra work and costs that this requirement currently imposes, and investors will instead have to derive their own comfort (or not) from prospectus disclosures made by the issuer when it comes to list.
Other existing eligibility requirements that also operate as on-going obligations - e.g., that the issuer carries on an "independent" business - would be modified to allow for a more flexible approach to be taken by the FCA with respect to "diverse business models" and "potentially, more complex corporate structures".
These relaxations in listing eligibility will continue to be back-stopped by the FCA's statutory power to refuse a listing if it thinks it would be prejudicial to investor interests.
DCSS - super-weighted voting shares
In December 2021, changes were made to the Listing Rules in the hope of encouraging tech and other startups to list in the UK with "founder shares" carrying super votes helping to entrench the position of the founder in the startup for an initial period following the IPO, as is allowed in other competing listing venues such as New York, Singapore and Hong Kong. The changes allowed the premium listing of dual class share structures - i.e., one vote per share ordinary shares and "founder" super-weighted voting shares, with strict limits on the latter. These included a five year life before the shares would lose their super votes, a maximum voting voting preference of 20 votes per share and limiting the exercise of those votes to scenarios in which the founder-holder of them may be removed as a director and following any 50%+ change in control of the issuer. CP23/10 proposes dropping or relaxing those restrictions (see the table above) while retaining the requirements that the "founder" shares are held by a director of the company and actually tightening the restrictions on transfer by forcing the conversion of the shares into one vote per share on the death of the founder director during the new 10-yr life of the shares. Super votes would also not be exercisable to approve an issue of shares at a discount of more than 10%.
CP23/10 also proposes dropping the premium listing rules that: (i) require an agreement between the issuer and any controlling (30%/+) shareholder it may have, intended to ensure that the issuer can operate independently of its controlling shareholder, and (ii) give independent shareholders enhanced voting rights on any related party transaction (RPT) with a controlling shareholder, no matter how small, if the controlling shareholder protections are not followed. In their place, CP23/10 proposes enhanced disclosure (including a discussion of risk factors) about the lack of any such agreement with a controlling shareholder.
Independent director election
One important part of controlling shareholder regime for premium listings that the FCA is proposing to retain in the new ESCC listing segment is the two-stage process for the election of independent directors. This requires separate voting by both all the shareholders (and so including the controlling shareholder) and by the independent shareholders alone (with a final vote by all shareholders if the two earlier votes disagreed) to elect an independent director.
No shareholder votes or circulars for “significant” (i.e., Class 1, 25%) transactions or on 5% RPTs
Class 1 transactions
One of the biggest (if not the biggest) changes that CP23/10 proposes to the current premium listing rules is to do away with the need for shareholder approval (with a FCA pre-approved circular) for non-ordinary course transactions (which reach a 25% (or more) percentage ratio under the various “acquisition size” “class” tests that the rules prescribe) and for “non-ordinary course” RPTs which, applying the same tests, reach a 5% ratio. In DP22/2, the FCA canvassed views on raising the level of the 25% ratio tests - possibly to 33% or much more - rather than abolishing the concept altogether. This reform goes much further and is coupled with four other notable changes:
Super large transactions that qualify as “reverse takeovers” under the listing rules - where the percentage ratios are 100% or more or which will result in a fundamental change in the business or board or voting control of the issuer - currently require and will continue to require, shareholder approval.
Needless to say there will likely be strong issuer support for these changes since they will help remove a material planning and completion risk issue for major transactions. That is the need to get at a “public” meeting shareholder support, rather than just having to deal with shareholder commentary or feedback in the press or in bilateral dialogue (important though that is, of course) and to include in the shareholder “Class 1” circular a working capital statement as well as other prescribed financial information. Investors (certainly buy side) are likely to be less enthusiastic about the loss of their voting input on large deals and the need now to relay any concerns they have about the business strategy, etc., through rather less structured dialogue with their investee company.
Related changes are proposed to the treatment of RPTs in the ESCC listing segment. Thus, a shareholder vote (and circular) on RPTs reaching a percentage ratio of 5% (based on the “class tests” discussed above) will no longer be required. However, the requirement that the issuer confirm that the RPT (as confirmed to it by its sponsor) is "fair and reasonable" will be retained and, in contrast to what is proposed for "Class 1" transactions, sponsors will have to consult with the FCA before agreeing any potential modifications to the class tests (minus, as mentioned above, the profits test) to establish whether the RPT meets the 5% trigger for what will now be a prescribed announcement, rather than a shareholder meeting.
Key differences between an ESCC and a Standard Listing
As can be seen from the above table, the new ESCC listing segment will have several significant new continuing obligations that the current standard listing segment does not have. The obvious question is whether the FCA is striking the right balance between the premium and standard listing requirements in creating this new single equity listing category. The concerns that were raised in relation to the DP22/2 proposals - which were, in some respects, rather less restrictive than these revised CP23/10 proposals are - that the UK was in serious danger of underestimating the attractiveness of its existing "minimal obligation" standard listing segment, are likely to be amplified, rather than lessened. Although the core standard listing of equity shares in the UK is small - DP22/2 suggested that, leaving aside secondary listings, etc., it may comprise just 30 or so commercial companies with equity listings - and has suffered from a perception that it is an "inferior" class of equity listing, it has also been seen as a growth area for UK listings because of its "light touch" listing obligations.
A new ESCC listing segment along the lines proposed would inevitably - as the FCA acknowledged in DP22/2 - force issuers to think carefully about what value an "official" listing would actually add, especially one that did not come with index inclusion, over and above admission to AIM or another MTF market. As can seen from the table below, an AIM admission would clearly carry with it a lower set of trading or listing obligations than those applying to the ESCC segment.
For issuers which would otherwise apply for a standard listing, the new ESCC will also require them to satisfy the modified and less strict "independent business" eligibility requirements, etc., mentioned above, which is not something currently required for a standard listing.
Mandatory shareholder votes, DCSS restrictions and additional reporting
The new shareholder vote requirement in respect of reverse takeovers, delisting and discounted share offers would be a significant change to the current flexibility standard listed issuers enjoy in managing their listing. The introduction of two limits on super-weighted voting shares may be less of an issue considering how few DCSS issuers have listed in the standard segment. How much of a disincentive the other additional ESCC reporting obligations will be for issuers who would otherwise have opted for a standard listing, will no doubt depend on the comparative attractions of an AIM admission.
Key differences between an AIM admission and ESCC listing
Other listing categories
As well as the new ESCC segment, the FCA is proposing a new "equity share cash shell/SPAC" listing category with continuing obligations more appropriately focused for such entities, possibly with a sponsor appointment requirement. There would also be a further "other shares" listing segment that would be available to accommodate non-equity shares (as the current standard listing segment does) and also, possibly, overseas companies with a "secondary" standard listing.
The current standard listing of debt and depositary receipts, etc, would lose its "standard" branding but otherwise likely remain the same. The "sovereign controlled commercial company" premium listing segment - in the FCA Handbook but not in use by any issuer - would, as with the premium segment itself, be rolled into the ESCC segment.
These include, as already indicated, changes to the role of a sponsor for an issuer with reduced work required in relation to those on-going situations where sponsor advice is required and a reframed single set of the Listing Principles (replacing the current "basic" and additional premium principles).
These will cover the transfer by existing issuers of the listing of their equity shares to the new single segment, the "other shares" segment or the cash shell/SPAC segment, as appropriate, and will not involve shareholder approval.
The FCA fairly recognises that listing rule changes will not, alone, make London the listing venue of choice for those companies currently either choosing to list elsewhere or not go public at all. As Julia Hoggett, CEO, London Stock Exchange, and other City grandees said very clearly in evidence before the Treasury Committee's Stock exchange listing oral evidence hearing last month, stock market listings form just one part of an ecosystem that is much bigger than simply the London Stock Exchange or even the listing regime itself. As important (or more so) than rule book changes and enhancements are things such as the amount of risk capital and other deployable capital, in particular, the much talked about de-equitisation of the UK (but not, seemingly as regards inward UK equity investment, overseas) pension and insurance markets, the dangers of our much vaunted "comply or explain" approach turning into a "comply or else" regime and the strength of the UK's equity research community.
If these proposals - controversial as some of them undoubtedly will be, both for issuers and investors - end up striking the right balance between flexibility and investor protection and, critically, the indexation rules can be appropriately adapted to them, the hope must be that they will play a valuable part in the long overdue re-invigoration of the UK's capital markets and in London's post-Brexit role as a global financial centre.