FCA publishes details of the new UK equity listing regime

The Financial Conduct Authority (FCA) is currently consulting on its detailed proposals to make changes to the UK equity listing rules which will come into effect later in 2024. The reform aims to make the UK's listing regime more flexible and accessible to companies as well as more attractive for investors on UK markets.  

The UK Listing Review

This consultation implements some of the recommendations from the UK Listings Review in March 2021, where Lord Jonathan Hill outlined a number of proposals as part of a plan to strengthen the UK's position as a leading global financial centre.

The FCA has already addressed some of Lord Hill's recommendations. For example, it published final rules on strengthening investor protections in special purpose acquisition companies (SPACs) in July 2021 and made some further changes in respect of dual-class share structures, minimum market capitalisation and minimum number of shares in public hands (known as the "free float") in December 2021.

This current 400-plus page consultation is a wholesale review of the current UK equity listing regime. It follows an initial consultation in May 2023 and includes a draft of the first section of the new UK Listing Rules (UKLR) which will be adopted in place of the current Listing Rules (LR) which are derived from EU law.

Commercial companies  

The central plank of the new regime is a new single listing category for equity shares in commercial companies. This replaces the current standard and premium listing share segments. This new category will apply to new applicants and to currently listed commercial companies (though there will be a transitional category for commercial companies that currently have a standard listing and a specific secondary listings category for the equity shares of overseas company with a primary listing on a non-UK market).

Surprisingly, the FCA does not intend to define what constitutes a "commercial company". Any company that does not fall into another defined listing category (such as shell company or closed-ended investment fund) and that meets the eligibility and continuing obligations requirements will be included in the commercial company category. Equity shares of sovereign-controlled issuers will also be included in the commercial companies categories – subject to certain targeted differences.

The key features of the proposals that will apply to commercial companies are detailed below.  

Financial eligibility requirements

The financial information eligibility requirements (which currently apply to premium listing applicants), will be removed. These include the requirement for historical financial information, a revenue-earning track record and a clean working-capital statement.

However, the requirement for historical financial information and a working capital statement will still be required under the prospectus regime and sponsors will be required to provide declarations similar to existing declarations including that an issuer has met its prospectus obligations and has a reasonable basis for the working capital statement within it.

Control and independence of business

The current premium-listing segment requirements for a company to demonstrate that it carries on an independent business as its main activity and that it exercises operational control over its business have generally been removed, although a company will still have to satisfy the FCA that its board is not externally managed and, where there is a controlling shareholder, the business is able to operate independently from that shareholder (via written controlling-shareholder agreements and maintaining certain related voting controls).    

Dual- and multiple-class share structures

Commercial companies will be permitted to have dual- and multiple-class share structures at admission and the dual-class share structure regime that was introduced in December 2021 will be further relaxed.

Specifically, there will be no time limit on the exercisability of the enhanced voting rights, there will be no maximum to the weighted voting ratio and enhanced voting-rights shares may be held by investors, shareholders, employees, as well as directors, of the applicant. Enhanced voting-right shares will not be transferrable except in limited circumstances and no further enhanced voting shares may be issued after listing

There will be some matters on which  enhanced voting rights will not be exercisable (namely, matters required by the UKLR such as approval of employee share schemes, long-term incentive plans, discounted option arrangements, certain discounted share offers or placings, certain buy backs and cancellation or transfer of the listing). However, the FCA believes that founders and other shareholders who hold enhanced voting-right shares would be able to exercise influence on most strategic matters affecting the future of an issuer.

Significant transactions

Commercial companies will not need to obtain shareholder approval or publish a shareholder circular at any level in relation to significant transactions (currently known as class 1 and class 2 transactions) except for in respect of reverse takeovers or involving a fundamental change in business. Instead, there will be an enhanced market-notifications regime for transactions that meet the current class 1 threshold. No notifications will be required for current class 2 transactions.

Shareholder votes will be retained for share buy-backs, non-pre-emptive discounted share issuances and cancellation.

Related party transactions

Shareholder votes will not be required for related party transactions. Instead, where the transaction meets the 5% threshold on the class tests, the board, excluding any conflicted directors, will be required to approve the transaction, the company's sponsor and security holders will need to confirm that the transaction is "fair and reasonable" and the company will need to make a timely market notification about the transaction, including that it has received the "fair and reasonable" confirmations.

No notification or sponsor confirmation will be required for transactions below the 5% threshold (though companies will still need to consider their Market Abuse Regulation or other disclosure obligations in relation to these transactions).

Annual reporting

The provisions that currently apply to premium-listing annual disclosures will largely be maintained, including comply or explain disclosures under the UK Corporate Governance Code and reporting on climate and diversity.

Other categories

Although the commercial company equity shares category is intended to be the main category, the FCA will be retaining some other categories of listing and introducing further new categories.

These are as follows:

• Transition category. A new closed category based on current rules for standard listed shares. Standard listed issuers who are mapped to this category on day one will be subject to a proportionate transfer process if they wish to move to the commercial companies category.
• International secondary listing. A new category designed for non-UK incorporated companies with more than one listing where their “primary” listing is on a non-UK market. It replicates the current standard listing rules with targeted ongoing provisions tailored to a “secondary” listing.
• Shell and SPAC category. This existing category will be retained. The FCA will largely maintain the current rules for standard listed shares with tailored eligibility and continuing obligations reflecting certain features of the current guidance regime for special purpose acquisition companies (SPACs). There will be supplementary requirements based on the existing conditions that enable large SPACs to avoid suspension if they have implemented certain investor protections such as the requirement for a shareholder vote on the first transaction. This category will require a sponsor at admission and to support the initial (reverse takeover) transaction.
• Closed-ended investment funds. The rules for this category will be based on existing obligations. A shareholder vote will still be required on material changes to investment policies, management fee changes and certain related party transactions. Listings of "C" shares within this category will be allowed where such shares carry voting rights prior to conversion.
• Open-ended investment companies: This category will be retained with only consequential or minor changes to existing requirements.

Sponsor regime

The FCA will also be making changes to the sponsor regime. Sponsors will continue with their role as part of the admission process; but post initial listing, instances requiring sponsor involvement, in terms of a formal sponsor service appointment, will be targeted at circumstances where an issuer is facing fundamental change and in certain other narrow circumstances where it offers the most benefit to the FCA, the company and its shareholders. This will reduce the number of instances when listed companies would be required to appoint a sponsor. However, the FCA anticipates issuers will continue to seek guidance or legal advice on any aspect of the UKLR or other relevant regime (market abuse, disclosure and transparency, prospectus).

A new rulebook

The changes will be implemented by the creation of a new UK Listing Rules sourcebook (UKLR) which will replace the existing Listing Rules sourcebook (LR). UKLR will re-order and re-structure the existing LR so issuers and advisers will need to become familiar with a new rulebook.

(The structure of the UKLR is set out in table 2 at paragraph 3.10 of the current consultation and a table showing how UKLR relates to the LR can be found at appendix 3 of the current consultation.)

Next steps

The current consultation was published on 20 December 2023 and includes the new UKLR which will underpin the new commercial companies category and sponsor regime. The FCA will be publishing the final section of the draft new UKLR that covers other categories and the remaining provisions that impact all issuers later in the first quarter of 2024 alongside proposed revisions to key technical and procedural notes.

Comments on the draft new UKLR (both the section published in December 2023 and the section to be published later in the first quarter of 2024) are required by 22 March 2024, except for comments on the proposals on sponsor competence (set out in current Listing Rule 8) that are required by 16 February.

The FCA intends to publish the final set of the new UKLR at the start of the second half of 2024. There is likely to be only a two-week period between publication of the final rules and implementation, meaning that the new UKLR are likely to be in force from summer 2024.

Osborne Clarke comment

We welcome these changes that seek to improve the London market's competitiveness and create a level playing field with other major international trading venues. As a package of measures alongside the Edinburgh reforms, the Austin review of secondary capital raisings and other regulatory changes, we very much hope that a more attractive listing regime will lead to renewed appetite from issuers to access the UK capital markets.

We particularly view the proposed changes around the removal of shareholder approval for class 1 and related party transactions as positive given they have tended to disproportionately impact smaller companies, but it will be interesting to gauge the response of the investor community to dual-class share capital structures, the removal of the need for a clean working-capital statement and some of the other suggested measures.

These are potentially positive rule changes, but it remains the case that liquidity, deeper pools of capital and a favourable tax regime are absolutely fundamental for a thriving marketplace.