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Listing rules update – controlling Shareholders: Listing Rules (Listing Regime Enhancements) Instrument 2014/33

The Financial Conduct Authority (FCA) has confirmed its intention to implement changes to the Listing Rules (LR), as previously detailed in its November 2013 consultation paper (CP 13/15) in relation to controlling shareholders (CS).

The text of the changes is contained in the FCA’s Listing Rules (Listing Regime Enhancements) Instrument 2014/33 (FCA 2014/33) and the FCA has fast tracked the implementation of these changes, now due to come into force on 16 May 2014.

The changes are intended to strengthen minority shareholder protection in situations where they may be at risk of being abused and, in particular, focus on addressing concerns in relation to the potential influence CS may have on UK listed companies.

Whilst companies affected by the changes will need to take action to ensure compliance, it is hoped that such changes will assist the effectiveness of the UK listing regime and ensure London remains an attractive forum for listing.

Our November 2013 PLC Update reported on the proposed changes set out in CP 13/15 requiring listed companies with CS to put in place a controlling shareholder agreement, commonly known as a relationship agreement (RA).

Following consultation on the initial proposals, the FCA has made a number of changes, in particular in response to feedback suggesting amendments be made to reduce complexity and improve clarity where possible and to ensure the rule changes are proportionate and effective.

In summary, the key changes that will affect premium listed companies are as follows:

Definition of CS

Inclusion of an amended definition of a CS so that a person’s interests will be aggregated with those of their concert parties but not of their associates. A CS means “any person who exercises or controls on their own or together with any person with whom they are acting in concert, 30% or more of the votes able to be cast on all or substantially all matters at general meetings of the company”.

Certain voting rights are disregarded for the purposes of the calculation (see proposed LR 6.1.2AR). The FCA has not provided guidance as to what is meant by acting in concert.

Definition of Associate

The FCA has also set out a new and detailed definition of “associate” (as proposed in CP 13/15), covering both natural persons and corporate entities to prevent a CS avoiding the provisions by splitting interests across a group of companies or family members.

Independent Business Test

The introduction of new guidance relating to the independent business test. Companies seeking a premium listing are required to demonstrate that they will be carrying on an independent business as their main activity. The rule changes will contain new details to indicate when an applicant may not satisfy the independent business requirement.

For example, when a company does not have freedom to implement its own business strategy. It should be noted that mineral companies and scientific based research companies will no longer be exempt from complying with the independent business requirements when applying for premium listing.

However, mineral companies will be exempt from the guidance in LR6.1.4AG (5) that an applicant may not satisfy the requirement for an independent business if its business consists primarily of holdings in non-controlled entities.

Relationship Agreement

The FCA is proceeding with the reduced mandatory content requirements meaning that the agreement must include undertakings that:

  • transactions and relationships with the CS (or its associates) are conducted at arm's length terms on normal commercial terms
  • the CS and its associates will not take action to prevent the company from complying with its LR obligations, and
  • the CS and it associates will not propose (or procure the proposal) of a shareholder resolution to circumvent the proper application of the LR.

Multiple CS

In the event a premium listed company has multiple CS it will not be required to enter in a RA with each of them as long as one CS can, with reasonable certainty, procure the compliance of the others with the agreement. The RA must contain this procurement obligation and must name any non-signing CS.

Non-compliance Notification Obligations

A company will be required to notify the FCA if RA provisions are not complied with and include any such details in a statement in the company’s annual report, if relevant.

Independent Directors

In relation to independent directors, the FCA has decided not to proceed with its original proposal to set out mandatory requirements for the composition of company boards where there is a CS (ie requiring such a company to have a majority of independent directors on its board). The balance of the board of directors therefore remains a “comply or explain” issue in accordance with the UK Corporate Governance Code.

However, a dual voting structure (which must be provided for in the company’s constitution) is being introduced in relation to the appointment (or re-election) of any independent directors of premium listed companies with CS, requiring approval by both the shareholders as a whole and by the “independent shareholders” (see below).

If the election (or re-election) of an independent director is not approved by both shareholders and independent shareholders under the dual voting structure, a further, single, majority vote of all shareholders (taken as a single class) may take place at least 90 days, but not more than 120 days, after the original vote.

Independent Shareholders

The FCA is proceeding with the definition of “independent shareholders” consulted on in CP 13/15 which states that an independent shareholder will be any person entitled to vote on the election of directors of a listed company that is not a CS.

Annual Report Disclosure

The directors of the company will be required to include a statement in the annual report that the company has entered into a RA as well as a statement that the company and CS have each complied with the mandatory independence provisions in the RA during the related period.

The company will be permitted to qualify the compliance statement in relation to the CS by awareness (eg “in so far as it is aware”). The annual report should include details of any noncompliance and, if applicable confirm that the FCA has been informed of any breach.

Protections on Cancellation of Listing

Provision of enhanced protections for minority shareholders in situations where a premium listed company with a CS wishes to delist or to transfer its listing to the standard segment.

If such a company wishes to apply for cancellation it must obtain approval of a majority of at least 75% of the votes attaching to the shares of those voting as well as gaining approval from a majority of the votes attaching to the shares of the independent shareholders.

In the event of a takeover offer, an equivalent requirement based on acceptances will apply, except that when an offeror has acquired or agreed to acquire more than 80% of voting rights no further approval/acceptances by independent shareholders would be required to cancel their premium listing. Similar provisions apply when a company with a CS is seeking to transfer from premium to standard listing.

Listing Principles

Two new Listing Principles have been added, Listing Principle 3 requiring that each share within a premium listed class should have equal voting power and Listing Principle 4 requiring that the aggregate voting rights of different premium listed share classes should be proportionate to their relative interests in the company’s equity.

The intended aim of these Listing Principles is to prevent super-voting shares and the creation of artificial structures designed to allow control to rest with a small group of shareholders.

Sanctions for Breach

The FCA has also implemented enhanced oversight measures which would require all transactions, regardless of their size, with the relevant CS and its associates to be subject to prior independent shareholder approval as related party transactions under LR 11 in the event of breach. These measures will be triggered in the following circumstances:

  • where the premium listed company does not have a required RA in place
  • where the premium listed company breaches the independence provisions in the RA
  • where the premium listed company becomes aware that a CS or any of its associates is breaching an independence provision in the RA, or
  • where any independent director disagrees with the board’s assessment of whether the obligations have been complied with.

The sanctions will remain in place until the publication of the next annual report in which the board makes a clean compliance statement without any disagreement from independent directors (LR 11.1.1ER).

Action Required

As a result of FCA 2014/33 premium listed companies will need to take action to ensure compliance with the new requirements by 16 November 2014. In particular, premium listed companies will need to:

  • review any existing RA it has in place with any CS to ensure compliance with the updated LR requirements and if no such agreement is in place an RA should be drafted and entered into
  • review their Articles of Association (or other relevant constitutional documents) to ensure the dual voting structure has been provided for and that there is no provision in the Articles preventing the election in such a manner; any amendments required to the Articles of Association should be addressed at the company’s next annual general meeting, and
  • ensure the company’s next annual report contains the necessary CS disclosures.

The instrument comes into force on 16 May 2014 and the FCA has indicated that the feedback statement to CP 13/15 will be published on the same day.

Charles Russell Speechlys has experience in advising listed companies in relation to these LR changes, as well as the UK listing regime generally, and in particular continues to advise clients on RA. Please contact us should you require any assistance in this area or you require any further information.

For more information please contact Mark Howard on +44 (0)20 7203 8902 or at mark.howard@crsblaw.com