The proposals for the new listing segment are set out for discussion in the FCA’s discussion paper “Primary Markets Effectiveness Review: Feedback to the discussion of the purpose of the listing regime and further discussion” (DP 22/2) which also outlines the consultation feedback received on the FCA’s proposals for structural reform as outlined last year in CP 21/21: Primary Markets Effectiveness Review.
The structure of the UK’s capital markets is at a critical point in its development following the UK’s exit from the European Union. Key stakeholders, including the Government and the FCA, have recognised that there is now a unique opportunity to pursue significant regulatory change in order to enhance the UK’s competitiveness as an attractive, global listing destination. Consequently, a number of important regulatory initiatives are currently being undertaken which propose significant changes to the UK’s capital markets, including Lord Hill’s UK Listing Review, the review of the UK prospectus regime and the independent UK secondary capital raising review.
Following the recommendations made in Lord Hill’s UK Listing Review, including the recommendation to consider reforming and re-branding the standard listing segment, the FCA sought views on four potential models of proposed reform for the structure of the UK’s primary markets in its consultation paper (CP 21/21). We discussed these proposals here.
Having considered a wide range of respondents’ views, the FCA has proposed a new UK listing structure which it hopes will remove the complexity of the current regime, broaden access to listing for a wider range of companies, ensure high quality disclosures for investors and allow for sufficient flexibility for greater investor engagement.
The key proposals are discussed below.
In general, what is proposed?
A new single listing segment for equity shares issued by commercial companies is proposed to replace the current premium and standard listing segments of the FCA’s Official List.
What is the scope of the single listing segment?
The single listing segment will be established primarily for commercial companies issuing equity shares. Overseas companies (including those listed in other jurisdictions) may also choose to list on the new segment – although, recognising that some issuers might have difficulties in meeting some of the requirements, the FCA notes that it will seek to maintain sufficient flexibility to allow such issuers to have a secondary listing in the UK.
The FCA further notes that whilst a SPAC is unlikely to be eligible to list its equity shares in the new segment (see eligibility criteria below), following an acquisition, the combined entity will need to consider whether it meets the new eligibility criteria if it chooses to list in the new segment.
Where will other securities be permitted to list?
Whilst it might not be named as such, the ‘standard listing’ segment in its current form will remain for other companies which currently have a standard listing, including those issuing debt and debt-like securities, securitised derivatives, non-equity shares (such as preference shares) and depositary receipts – although, the FCA is seeking views on whether the latter securities should be eligible to list on the new listing segment, given their similarities to equity shares.
Will there be a separate listing segment for debt?
Following consultation feedback, the FCA has concluded that a separate segment for debt and debt-like securities is not required, noting that the relevant disclosure requirements are predominantly set out in the prospectus regime and, consequently, any future reforms in respect of debt securities should be considered as part of the UK prospectus reforms.
Are shares in closed ended investment funds eligible to list in the new segment?
The FCA is seeking views on its proposal that closed ended investment funds would not be within scope (given that it has not identified any concerns with the current regime). Consequently, equity shares in closed ended investment funds would be subject to the same provisions as currently set out in LR 15 – albeit, without the label of a ‘premium listing’.
Will the new form of permitted dual class share structures be permitted?
Views are sought on whether dual class share structures (DCSS) (as recently permitted in the premium listing segment, subject to certain restrictions (which we discuss here)) should be permitted in the new single segment. If so, this would mean that the more permissive form of DCSS as is currently permitted in the standard listing segment would no longer be available – an issue for those companies which do not wish to change their current capital and voting structures – and were attracted to the standard listing segment for such flexibility. The FCA considers that it would not be appropriate to allow the more permissive form of DCSS on the new single segment in order to maintain high levels of transparency, corporate governance and shareholder protections in the new single segment.
What is the new eligibility criteria?
Issuers would be subject to a single set of eligibility criteria based on the current premium listing eligibility requirements – but without requiring the following financial criteria:
- the three year representative revenue earning track record;
- three years’ audited historical financial information that represents at least 75% of the issuer’s business; and
- a ‘clean’ or unqualified working capital statement.
Instead, the FCA seeks views on whether these requirements should be replaced by a ‘disclosure-based regime’, where the necessary financial information would be disclosed in the prospectus, leaving investors to set their own criteria on the “quality” of the company and whether or not to invest in it. Consequently, the FCA notes that this will require further consideration of the financial disclosure requirements as part of the ongoing review of the UK’s new prospectus regime.
What are the continuing obligations applicable to issuers listed on the new segment?
The FCA proposes that all issuers listed on the single segment should be subject to one set of “mandatory” continuing obligations based on the current premium listing continuing obligations that focus on transparency and protecting shareholders where management or significant shareholder interests might differ to ordinary shareholders. These include, among others, obligations relating to: related party transactions, control of business, cancellation of listing, rights issues and open offers, dealings in own securities and treasury shares and the comply or explain provisions relating to corporate governance, climate change reporting and diversity and inclusion.
The FCA has also proposed further “supplementary” obligations which issuers can choose to “opt into” and which would give shareholders enhanced oversight and control over the company’s affairs. These supplementary obligations would include the current provisions relating to: controlling shareholders; the requirement to have an “independent business”; and the significant transactions regime. Note that issuers would need to opt into the “supplementary” regime as a whole and would not be able to pick and choose.
All issuers would also continue to be subject to MAR and DTR obligations.
Are any changes proposed to the significant transactions regime in LR 10?
The FCA acknowledged the consultation feedback from some respondents that the significant transactions regime, as set out in LR 10, is particularly onerous for premium-listed issuers. In summary, the rules require premium-listed issuers to produce an FCA approved explanatory circular for its shareholders and seek their prior approval for ‘class 1’ transactions (being transactions that reach or exceed 25% of specified tests on gross assets, profits, consideration and gross capital). Respondents argued that, aside from the time and cost burden of complying with the requirements, premium-listed issuers are often put at a disadvantage in competitive auction processes to the extent that any offer they make is always subject to subsequent shareholder approval. Consequently, the FCA is seeking views on which factors should be relevant when assessing which transactions should be put to shareholders and whether the percentage limits remain appropriate, noting that one respondent suggested a 33% threshold would strike a better compromise.
What is the name of the new segment?
The new listing regime will be re-branded, such that issuers with equity shares admitted to the new listing segment will be described as having a “UK listing”. This is regardless of whether they have chosen to opt into the “supplementary” regime.
Will issuers be eligible for index inclusion?
The FCA is cognizant of how important index inclusion is to certain investors and notes that it sought to engage in ongoing dialogue with the index providers when formulating its proposals. However, ultimately, it will be for the index providers, in conjunction with the investment community, to determine whether index inclusion is only extended to those issuers who opt for the supplementary regime or whether there is now market-wide appetite for index inclusion to track the FCA’s proposed, simplified, mandatory regime.
How would the transition to the new single listing segment work?
For existing standard listed companies, the FCA is considering allowing those that are unwilling to transition or unable to meet the eligibility criteria to retain their listing in the (old) standard listing segment. Those that do wish to transition to the new segment would undergo an eligibility assessment with the FCA.
For existing premium listed companies, each company will need to consider whether or not to opt into the ‘supplementary’ regime and the FCA notes that issuers should do so in consultation with their shareholders. Consequently, the FCA suggests that one option would be to require each company to consider what they would prefer within a specified period and then the company would propose a resolution to be put forward for shareholder approval at its next AGM.
Will the sponsor role feature in the new regime?
Yes – the FCA has confirmed that the sponsor regime will be retained, stressing its significance for preserving the integrity of the premium listing regime by providing expert advice and guidance to issuers and, additionally, providing key confirmations and assurances to the FCA in respect of issuers’ regulatory obligations. Indeed, former standard listed issuers would need to appoint a sponsor if they choose to list on the new segment – and sponsors will need to ensure that such issuers properly understand their enhanced regulatory obligations under the new regime.
However, the consultation feedback revealed areas of inefficiencies within the sponsor regime which the FCA seeks to review and improve. These areas are as follows:
- record-keeping – whilst the FCA is reluctant to reduce sponsors’ record-keeping obligations, the FCA does recognise that compliance with the relevant obligations requires a significant time commitment. Consequently, the FCA is consulting on how the requirements could be made more proportionate and efficient;
- conflicts of interest and fee structures – the FCA is seeking views on whether enhanced disclosure and transparency of sponsor fee structures help to better understand the sponsor role and to avoid conflicts of interest that could adversely affect a sponsor’s ability to perform its function; and
- role of sponsor in single segment – more generally, the FCA seeks views and suggestions on the role of the sponsor in a single segment regime, including whether the role could be reduced in certain circumstances without materially impacting the benefits gained from the sponsor regime.
A significant change in form or substance?
The proposals for a single listing segment signify a concerted effort by the FCA to simplify the regime for commercial companies issuing shares, whilst ensuring that the highest governance standards are maintained.
Removing the financial requirements from the new eligibility criteria is likely to be welcomed by many stakeholders, as those requirements have long been cited as significant barriers to a UK listing, particularly for early stage technology and life sciences companies. Moving to a disclosure-based regime will allow market forces to determine what financial disclosure is considered necessary to support a successful IPO.
However, whilst the reduced eligibility criteria might attract some companies to a UK listing, the current ‘standard listing’ segment (which has less stringent governance requirements and permits greater flexibility around share capital and voting structures) would no longer be an option for new issues of equity shares on the Official List. Instead, new issuers which still require that level of flexibility would need to consider unlisted markets in the UK, such as AIM.
As referred to above, the approach of the index providers, in conjunction with the investment community, will be crucial in determining the success of the proposed changes. If index inclusion requires an issuer to opt for the supplementary regime, that will significantly curtail the take-up of the more streamlined, mandatory regime, and undermine a lot of what the FCA is trying to achieve. Conversely, if index inclusion does not require an issuer to opt for the supplementary regime, it is difficult to see many issuers favouring that option. In which case, there is an argument for exploring whether the FCA could drop the supplementary regime altogether and rely on issuers using other means to impose some or all of those enhanced restrictions where they continue to be required or desirable (for example, by provision in their articles of association).
Responses are due to be submitted by 28 July 2022. The FCA will then provide feedback and consider whether to publish a consultation paper with its proposals in due course or issue a further discussion paper.
If you have any queries on the FCA’s proposals or any other matter relating to the UK’s capital markets, please contact one of the listed contacts or your usual contact at Hogan Lovells.
Authored by Tom Brassington and Danette Antao