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Proposed changes to the Listing Rules in relation to controlling shareholders

22 May 2014

Some significant changes have been made to the Listing Rules following the FCA's recent consultation.

In this article we look at one of the changes in relation to premium listed companies - the requirement to have a relationship agreement in place if there is a controlling shareholder.

This change, along with certain other amendments to the Listing Rules, came into force with effect from 16 May 2014.

Controlling shareholders

A new definition of controlling shareholder is to be introduced and will cover any person who, individually or together with any of their associates and concert parties, exercises or controls 30% or more of the shares capable of being voted at the company's general meeting.

Oddly, the FCA is not proposing to define, or issue any guidance on, what is to be considered 'acting in concert'.

Although it is a term recognised in the context of the Takeover Code, listed companies and their shareholders should not presume that the FCA will agree that a shareholder is, or is not, a controlling shareholder on the basis of the Takeover Code's definition.

A number of responses to the consultation noted that it would be very useful to have a definition or guidance.

Relationship agreements

Where a premium listed company has a controlling shareholder, a 'relationship agreement' will be required in order to protect independent shareholders at all times during which the company maintains its premium listing and retains a controlling shareholder.

Note, as a minor point, that the FCA have not proceeded with the requirement for the document specifically to be called a relationship agreement.

Relationship agreements will be required to be written and legally binding (although there are no requirements as to the choice of law or jurisdiction).

The controlling shareholder must undertake:

  • to have an arms' length relationship with the company and only transact with it on an arms' length basis
  • not to take any action to prevent the company from complying with the Listing Rules
  • not to propose any shareholder resolution aimed at circumventing the proper application of the Listing Rules.

A company required to have a relationship agreement in place must make certain disclosures in its annual report including:

  • a statement by the directors that the company has entered into a relationship agreement and, if it has not, a confirmation that the FCA has been notified and an outline of the reasons for such breach
  • a statement by the directors that the company and the controlling shareholder have complied with the relationship agreement throughout the financial year to which the report relates. Where there has been non-compliance this must be detailed, along with a confirmation that that the FCA has been informed
  • in a situation where an independent director does not support the board's statements regarding the company's compliance with a relationship agreement and/or compliance with the independence criteria, a statement must be made to highlight the dissenting view. If such a statement is to be included in an annual report the company must notify the FCA without delay.

Premium listed companies with controlling shareholders will have six months from the time the rules come into force (ie by 16 November 2014) in which to put a relationship agreement in place.

If a premium listed company, whether through an acquisition of new shares or by purchases in the market, comes to have a controlling shareholder on its register of members it will have six months from the date of that shareholder becoming a controlling shareholder to put such an agreement in place.

Sanctions for breaching relationship agreements

Where there has been a breach of a relationship agreement, or one is not in place when it should be, or an independent director has disagreed with the board's statements concerning the relationship agreement, all transactions with the controlling shareholder will be subject to prior independent shareholder approval, regardless of their size.

Elections of independent directors

Where a company has a controlling shareholder, the appointment of independent directors (which the UK Corporate Governance Code states should, excluding the Chairman, comprise half of the board) be approved by the shareholders as a whole and, as a separate second vote, by the independent shareholders.

Premium listed companies which have a controlling shareholder will be required to amend their articles of association to allow for this dual voting procedure. 

We understand that registrars are concerned as to where the liability would rest for ensuring that only shareholders deemed to be independent of the controlling shareholder vote in the second vote.

This article was written by Paul Arathoon.

For further information please contact Paul on +44 (0)20 7427 6515 or paul.arathoon@crsblaw.com.