New UK listing rules: streamlined and simplified

The new Listing Rules, which were published on 11 July 2024, were described by the Financial Conduct Authority (FCA) as the most significant changes to the UK listing regime in more than three decades. After several years with a dearth of initial public offerings (IPOs) and many cancellations of listings, whether as a result of mergers, take private bids or initiated by the company, it remains to be seen whether the new regime will make a difference (see “Aims of the reforms” and News brief “UK capital markets reform: nearing the finish line?”).

The new Listing Rules will come into force on 29 July 2024. While the changes will generally be welcomed by issuers, since they will remove some barriers to a listing and should reduce costs and complexity, they will not, of themselves, make a London listing a compelling option. Money talks and the US markets generally attribute higher valuations to issuers.

Aims of the reforms

The reforms to the listing regime are designed to remove barriers to listing and reduce costs and complexity. The removal of shareholder approval for Class 1 transactions and related-party transactions (RPTs) will be welcome, especially for an acquisitive company, as it was a major deterrent to listing and a particular handicap should it become involved in a bidding process. Shareholders will not be able to block significant transactions or RPTs of which they disapprove and the current safeguards on controlling shareholders and dual class share structures will be diluted.

The Financial Conduct Authority (FCA) believes that the changes in the Listing Rules may lead to more direct engagement between investors and companies, with an increased focus on company strategy and director appointments in lieu of votes on specific transactions. Be that as it may, the lack of shareholder approval, controlling shareholder provisions and restrictions on dual class share structures have not deterred institutional investors in investing in overseas markets, with the FCA noting that, as of 2021, 77% of UK asset managers’ allocations were invested in non-UK entities.

Barriers removed

The removal of barriers includes the abolition of the requirements for a three-year financial track record and a working capital statement. However, the prospectus regime, on which the FCA will be consulting shortly, will require financial information. Some of the reforms will simply level the playing field by removing gold plating, for example, the rules requiring shareholder approval of major transactions and related-party transactions (RPTs) (see “Major transactions” below).

Single listing segment

The new regime will remove the two-tier system for the listing of equity shares that has been in place since April 2010; that is, a premium listing that included the gold-plated provisions, and a standard listing that applied the minimum requirements of EU directives. New applicants for a listing of equity shares will have to apply for listing as a commercial company or, if relevant, as a shell company or a closed-ended investment fund. Issuers with a current standard listing can continue this status indefinitely with, in effect, the current listing rules applying.

Issuers of equity shares in commercial companies, shell companies and closed-ended investment funds will have to appoint a sponsor in the following circumstances:

• On applications for listing.
• For a reverse takeover.
• For an initial transaction, if they are a shell company.
• For a cancellation of listing.
• On applications to transfer their listing category.
• For advice on RPTs.
• For applications for guidance on, or a modification or waiver of, a particular listing rule.

Dual class share structures

Provision for dual class share structures, where a company has more than one class of equity shares listed and one class has weighted voting rights, has been much expanded. The FCA had gone some way to permit these in December 2021, but they were time limited to five years. The new provisions are much broader and impose no time limit on the shares held by a director, an employee, a related trust or company, or a sovereign-controlled company. Pre-IPO shareholders can have weighted voting rights for up to ten years following the IPO, which should be a welcome change both to venture capitalists and to founders.

Major transactions

Class 1 transactions, that is, acquisitions or disposals where the percentage ratio under the class tests are 25% or more, will require specific disclosures. No announcement will be required by the Listing Rules for the now removed Class 2 transactions, where the percentage ratio was 5% or more. However, an announcement might be needed to comply with the retained EU law version of the Market Abuse Regulation (596/2014/EU), so some companies may consider making the announcement that they would have made had the Class 2 rule remained in place. RPTs where the percentage ratio is 5% or more require both board approval and a sponsor’s fair and reasonable opinion, but not shareholder approval, unless the issuer is a closed-ended investment fund and the RPT is an increase in the investment manager’s fees of 5% or more under the Class tests, or is uncapped. The removal of the profits comparison is a welcome change to the class tests.

Shareholders

The definition of a substantial shareholder related party will change from a holder of 10% or more of the voting rights to 20%, which is another welcome change for issuers.

The rules relating to controlling shareholders, that is, a person or concert party that controls 30% or more of the aggregate voting rights, will also be relaxed, with a focus on disclosure. This is the FCA’s third about-turn on this issue, as it removed the requirement for a relationship agreement following its 2004 Listing Rules review, then reimposed the requirement in 2014.

The FCA has now reverted to its 2004 position that this should be a matter for disclosure and there will be no requirement for a controlling shareholder agreement. However, issuers that have one in place are unlikely to remove them. Furthermore, pressure from institutional shareholders may mean that new applicants with controlling shareholders will be advised to have a similar agreement. The provisions for separate votes on the election of independent directors will remain. The independent directors can make a statement if they consider that their company’s controlling shareholders are acting in a way that attempts to circumvent the Listing Rules.

In addition, the FCA has left in place a number of transactions that require shareholder approval, including:

• A reverse takeover.
• A cancellation of listing.
• A change of listing category.
• An issue of equity shares on a non-pre-emptive basis.
• The issue of shares at a discount of more than 10% of the latest mid-market closing price.
• Share buybacks.

Climate and diversity issues

There are no changes to the rules on the contents of annual reports on climate-related financial disclosures, the recommendations of the Task Force on Climate-related Financial Disclosures or on the diversity of the board and senior management.

Shell companies and overseas companies

Shell companies must make an initial transaction within three years of listing, with a possible six-month extension where an initial transaction is in course at the expiry of the three years.

Overseas companies with an overseas listing can have a secondary listing of their shares. However, a UK-incorporated company with a listing overseas would have to apply for listing as a commercial company and is not eligible for a secondary listing.

This article first appeared in the August 2024 issue of PLC Magazine: http://uk.practicallaw.com/resources/uk-publications/plc-magazine.