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In our November 2012 PLC Update, we reported that the then Financial Services Authority, now the Financial Conduct Authority (FCA), had proposed changes to the Listing Rules (LR) to reintroduce the requirement for listed companies with a controlling shareholder to put in place a relationship (or controlling shareholder) agreement (RA).
Whilst these proposed changes are yet to be implemented, practitioners will be aware it is already commonplace for both Main Market and AIM companies with substantial single shareholders to have in place a relationship agreement, and indeed often with shareholders holding a percentage below the 30% level at which the FCA is intending to introduce the requirement.
The RA is an agreement entered into between a company (Issuer) and a major shareholder (CS), or connected group of shareholders, holding interests in the Issuer at or around the level of deemed control for a listed company under the Takeover Code, ie 30%.
The precise level of holding that will trigger the need for the RA is, currently, a matter for the Issuer and its sponsor or NOMAD to judge, but it is not uncommon for listed companies with a shareholder holding less than 30%, sometimes as low as 15-20%, to have one in place.
Whilst the RA is effectively a form of minority shareholder protection, it is worth noting that only the Issuer is able to enforce its terms, not the minority shareholders themselves. As such, it is not an agreement commonly litigated over and there is little or no case-law around the enforcement of rights under the RA. It is perhaps better regarded as a commitment by an Issuer and its CS to adhere to best practice, and derives its value from that. Indeed, the FCA noted in its initial consultation widespread consensus that the RA was a “valuable tool” in regulating the relationship between an Issuer and its CS, which no doubt explains its common usage.
For Main Market companies, the position will of course change somewhat when, as is now proposed, there are specific requirements in the Listing Rules for an Issuer to have in place an agreement with its CS with mandatory content requirements, and sanctions available to the FCA in the event of its breach.
The core undertakings given by a CS typically in the RA will include commitments:
In addition, the commitments will typically extend to any director appointed to the Issuer’s board at the direction of the CS, who will similarly be expected to refrain from voting at
board level on any business with the Issuer in which the CS is interested or conflicted.
The undertakings by the CS will also generally include an obligation to procure, so far as it is able, that its “associates” comply with the terms of the RA. The definition of associates for this purpose will be for the parties to agree but one might expect it to include companies or trusts controlled by the CS, as well as persons accustomed to acting in accordance with their instructions, such as nominated directors.
The proposed changes referred to above are still under consultation by the FCA, with the next stage of reporting due during the first half of 2014.
The proposals include various mandatory content requirements for the RA, many of which are, as above, already commonplace in those that we see being used in both AIM and Main Market listings. As such, the proposals in their current form would not present a significant departure from current market practice.
The proposals state that a premium listed Issuer must be capable of acting independently of any CS and its associates that hold 30% or more of the shares or voting power in the Issuer or its parent undertaking, also that a relationship agreement must be put in place to govern this relationship, to ensure that the Issuer is capable of carrying on its business independently.
A new definition of “associate” is proposed to prevent interests being split across a group of companies to escape the LR provisions. The proposed definition will distinguish between an associate of a CS who is an individual and that which is a company. The FCA is not proposing any material changes to the definition of an individual associate, but the definition of an associate which is a company will change.
The current definition only identifies associates which are corporate entities and the proposals aim to widen this to also include individuals, thereby catching the scenario where an individual’s shares are held via a corporate entity. Such individuals would fall within the definition of associate if they hold at least 30% of shares in a company that is an associate of a CS, or if they are able to appoint and remove directors who hold a majority of voting rights at board meetings on all matters relating to a company that is an associate of a CS.
The FCA has released guidance to clarify that, where there is more than one CS, the Issuer does not need to enter into a separate relationship agreement with each CS, provided that one CS can, with realistic certainty, ensure that its associate or those acting jointly with it will comply with the independence provisions in the RA.
The requirement to have the RA in place would be a continuing obligation for so long as there is a CS. The FCA is not proceeding with its previous proposal that any material changes to the agreement would only be possible with shareholder consent. Instead, there can be no changes to the agreement in respect of essential principles for the Issuer to carry on an independent business as its main activity.
There will also no longer be any requirement for the agreement to be named a “relationship agreement”, and the only requirement is that it must be a written and legally binding agreement. In practice, it seems likely that such agreements will continue to be called “relationship agreements”.
The proposals would require the Annual Report of the Issuer to include a statement by its directors that the Issuer has complied with the RA throughout the relevant year. Where the RA has not been complied with, the UK Listing Authority (UKLA) would be informed and details provided in order for the shareholders to evaluate the impact of the noncompliance. The FCA proposes that, in such an event, all transactions with the CS would become subject to independent shareholder approval.
For existing Issuers without a relationship agreement, the FCA is proposing a transitional period of six months for the Issuer to comply with the requirements for a relationship agreement to be put in place.
The consultation closes on 5 February 2014. Depending on the feedback received, the FCA hopes to publish its feedback at some point during the first half of 2014. It is anticipated that the final set of rules will be implemented by the middle of 2014.
To read a copy of the consultation paper, please click here.
For more information please contact Mark Howard on +44 (0)20 7203 8902 or at firstname.lastname@example.org.