In its Discussion Paper 2022/2 (DP 22/2) published on 26 May 2022 the Financial Conduct Authority (FCA) has proposed some very significant changes to the standard and premium listing segments for UK listings of the equity of commercial companies.
DP 22/2 provides FCA feedback on its Primary Markets Effectiveness Review (the "Review") which was launched by Consultation Paper CP 21/21*** in July 2021.
The FCA is proposing a new single segment for the listing of equity shares of commercial companies (rather than, say, of investment funds or companies) with a single set of eligibility requirements and a two tier set of continuing obligations. This would replace the existing standard and premium listing segments for such shares.
At first glance, it is tempting to see these proposals as little more than a name change for the existing segments since companies wanting to list with minimal continuing governance and other obligations - currently offered by the standard segment - will be able to list without adopting some of the more stringent continuing obligations currently attached to a premium listing and which other issuers may choose to follow. In our view, however, that would be a mistake since the new mandatory set of continuing obligations will introduce a noticeably tougher or more demanding governance regime for standard listed companies than currently applies.
Other key points to note from the proposals are:
- the standard listing segment will remain as a listing option for certain issuers - notably for GDR and debt issuers
- the eligibility requirements that premium listed issuers must currently satisfy as a condition of listing will be replaced by prospectus or admission disclosures
- connected with the single segment change, the FCA is considering raising the current 25% threshold for "significant transactions" that require shareholder approval when conducted by premium listed companies, possibly to 33%
- notable areas where the new single segment's mandatory continuing obligations are proposed to be stricter for companies with a standard listing, include:
- restricting the use of dual class share structures ("DCSS") to those that follow the recently introduced requirements for their use in premium listings (e.g. maximum weighted voting ratios (20:1), shares may only be held by founder directors, time limited, etc.)
- applying the current "dealing in own securities restrictions" (LR 12) and requirements with respect to rights issues and other secondary offers that currently only apply to premium listings and mandating pre-emption rights
- setting the premium listing segment requirements for shareholder approval for certain related party transactions, employee share schemes and the cancellation of listing as mandatory continuing obligations for the single segment
- requiring the appointment of a "sponsor" (see below)
Eligibility requirements for the single segment
The eligibility requirements for the new segment would include a mixture of the existing requirements that apply to standard and premium share listings, such as a free float of at least 10%, a minimum market capitalisation of £30 million and other conditions required by the new regime, such as the ability to comply with the new continuing obligations (including the supplementary obligations where relevant), applicable listing principles and a new requirement (for standard listed issuers) to have a sponsor appointed (see below).
Financial "eligibility" disclosures
In place of the financial track record eligibility requirements that currently apply to premium listings (with modifications for certain specialist issuers) - i.e. a three year representative revenue-earning record, three year audited financials covering at least 75% of the issuer's business and a "clean" working capital statement - the FCA is proposing that that these requirements should be satisfied by appropriate prospectus disclosures.
"Business independence" as a continuing obligation rather than "eligibility" requirement
Other eligibility requirements that also currently operate as continuing obligations for premium listed issuers - such as carrying on an independent business, having "independence" safeguards in place where the issuer has controlling shareholders and having operational control of its business - would be retained but simply as continuing obligations. The existing requirements with respect to having an "independent" business and controlling shareholders would become part of the new "supplementary continuing obligations" and the operational control of business requirement would become a mandatory continuing obligation.
Premium Listing Principles
Currently, a premium listing carries with it a commitment by the listed company and its board to follow a set of enhanced listing principles focused on investor protection. These include principles directed towards to good governance - taking reasonable steps to ensure that directors understand their responsibilities as listed directors and acting with integrity towards shareholders (including avoiding any creation of a false market when communicating with them). They also include principles designed to avoid differential treatment of investors holding the same type of equity - such as equal voting rights for shares in the same class, requiring the voting rights of a class of shares to be proportionate to the equity interest in the company represented by the class and equal treatment of shareholders holding the same class of equity with respect to the rights attached to their shares.
Since the FCA views these principles as as an important means of ensuring high standards in the listed markets, it is proposing adopting the current premium listing principles as principles that should apply to the single segment whatever the level or tier of continuing obligations an issuer chooses to adopt. For issuers with a standard listing, this would add significantly to the very basic listing principle that applies to them, requiring them to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable them to comply with their listing obligations. Standard listed issuers may have reservations at becoming subject to the more onerous listing "ground rules" that currently only apply to premium listings - such as the "equal voting power" rule mentioned above (which, as already mentioned, is proposed to be extended to all listed issuers by virtue of the application of the recently introduced DCSS rules to premium listed issuers). However, the FCA's position on this point is clear - the division between the mandatory and supplementary continuing obligations in the new single segment should be narrower than it currently is between the standard and premium listing segments.
A two tiered approach to continuing obligations
The FCA summarises its approach to the continuing requirements under a new single segment listing as follows:
(taken from #3.72, page 32 of DP 22/2, (c) Financial Conduct Authority 2022)
As already mentioned, the most significant change to the existing premium and standard segments regime is the proposal that a single segment would have noticeably tougher continuing obligations for all issuers within it, including those standard listed issuers who currently enjoy a much lighter regulatory regime. Brexit has, in the FCA's view, removed the justification for a separate minimum standards listing segment and, contrary to some concerns that post-Brexit any regulatory reform must involve a "dumbing down" of standards, the FCA sees the current reforms as an opportunity to improve the investor protection and governance standards that should come from having a UK listing.
In commenting about the proposed DCSS minimum requirements that would take away from standard issuers their freedom to adopt any super-weighted voting structures that they wish to have, the FCA notes that that freedom would still be available to an issuer that choose to make use of "other public, unlisted markets" (subject to the market's rules), such as AIM or AQSE Growth Market.
So far as premium listed issuers are concerned, the big changes presented by the single listing segment proposal are the replacement of financial eligibility requirements with appropriate prospectus disclosures and the possible increase in the threshold at which "Class 1 significant transactions" require shareholder approval from 25% (based on a variety of deal ratios) to 33%. Such an increase would go some way towards addressing issuer concerns about having to prepare a detailed shareholder circular with a working capital statement, as well as arranging for the shareholder meeting to be held, especially where the 25% threshold is only marginally or "anomalously" exceeded. Obviously, the line for shareholder approval has to be drawn somewhere and it therefore seems sensible that, having operated the listing rules with this 25% threshold since taking over responsibility them in 2005, the FCA should now be reconsidering this level as part of the Review.
The FCA notes that the decision (whether or not) to adopt the supplementary continuing obligations - which will reflect those remaining premium listing obligations that will not become mandatory continuing obligations under the single segment regime - will need to be explained and justified to investors, who can then take their own decision as to whether that makes sense for the issuer and the investment proposition it is offering.
Sponsors for all issuers
Premium listed issuers are required to appoint an adviser (referred to as a "sponsor") to give them guidance with respect to certain of their key listing obligations, such as the issue of a prospectus or a class 1 circular in respect of a significant transaction, transfer between listing segments or with respect to the fairness and reasonableness of the terms of a related party transaction. Sponsors, which must be approved by the FCA to provide their sponsor services, must comply with certain sponsor principles and standards set out in the Listing Rules and provide to the FCA certain confirmations about the advice they have provided to their listed client and other explanations and information as requested to the FCA.
The sponsor regime is unique to UK listings although has its counterparts in admissions to trading on the so-called "junior" unlisted MTF markets such as AIM or the AQSE Growth Market where issuers must appoint a "nominated adviser" or a "corporate adviser" to assist them with their applications for admission and compliance with their continuing obligations.
In DP 22/2, the FCA notes that the feedback it received under its Primary Markets Effectiveness Review on the sponsor regime was largely supportive and therefore it is proposing that with a single segment of equity listings, the regime should apply to all issuers and not merely those opting to follow the "enhanced" supplementary continuing obligations.
Currently, inclusion in the FTSE UK indices is dependent on a premium listing. The FCA has no role in fixing the criteria for inclusion in the indices (which are determined by the index provider). The obvious question therefore will be whether it is only companies that choose to adopt the supplementary continuing obligations that will remain eligible for FTSE UK inclusion. This is not a question that the FCA can answer but is something that the index providers are obviously alive to and will be considering if the single segment proposal proceeds.
The FCA is considering introducing any new single segment regime with transitional arrangements that would allow existing standard listed issuers that might not be able to satisfy the new eligibility requirements - e.g. with constitutions, or subject to legal regimes, that are not compatible with pre-emption rights - a limited period of time in which to keep their standard listing before moving to the new segment.
With regards to premium listed issuers, the FCA notes that it would not necessarily be appropriate for such issuers to be automatically moved to the new segment and that it would be preferable for them to decide with their shareholders through a confirmatory vote, whether to join the segment and to adopt the new supplementary continuing obligations.
But not the end of the standard listing segment
As noted above, the FCA proposes that existing standard listing regime requirements - i.e. a listing without being required to appoint a sponsor or to comply with the full raft of the new mandatory continuing obligations - should remain available for certain issuers or securities. The most notable of these would be GDR issuers, overseas issuers using London as a secondary listing for their equity and SPACs (at least on their initial listing).
The FCA seems to be more open-minded about the possibility of DRs continuing to be eligible for a standard listing than perhaps other issuers - although of course it is worth noting that since July 2018 it has been possible for sovereign controlled commercial companies (uniquely among commercial companies) to apply for a premium listing of their DRs.
While the FCA obviously does not want to dissuade overseas issuers from seeking a UK listing because of the more onerous requirements of the proposed single segment, it seems likely that it will want to ensure that this option is only available to those issuers who are merely using their UK listing as a secondary listing. Otherwise, domestic issuers would be placed at a distinct disadvantage as regards their listing options when compared to overseas issuers.
Premium listings are currently available for two other categories of commercial issuers. They are mandated for the equity shares of closed-ended investment funds and are available for equity shares of a special type of commercial company - "sovereign controlled" commercial companies - in each case with modified requirements. DP 22/2 doesn't discuss any special treatment for sovereign controlled commercial issuers under the new single segment listing regime - no doubt because there have been no such listings since the relevant rules were introduced. The FCA does, however, suggest that the special listing requirements for closed ended investment funds might continue - with some possible exceptions (e.g. clean working capital statements to be replaced by prospectus disclosures) - albeit without the "premium listing" label.
In the Review, the FCA set out four possible new listing models - two retaining separate listing segments and two having a single segment. The single segment model was then subdivided into one with a single set of "premium" eligibility and continuing obligations requirements and the other, as is now proposed for further discussion, with a minimum set of conditions with additional disclosures and commitments for those issuers who choose to adopt them. The DP 22/2 proposals invite further discussion and debate about the merits and proposed details of this latter UK listing model.
The FCA proposes that listing on the single segment would be referred to simply as a "UK Listing". This would help address the recommendation included in the Lord Hill UK Listing Review that the existing standard listing segment should be rebranded and re-marketed to help reposition it as a more attractive listing option for young companies, whether high or low growth businesses. That said, as indicated above, it is clear that the current proposals extend well beyond a simple rebranding of the standard listing segment. It is not perhaps surprising therefore that some concerns have been voiced that what is proposed is not so much a rebranding exercise for commercial equity standard listings but rather the wholesale withdrawal of a standard listing as an option for such equity (at least where the listing will not be a secondary listing).
Comments on DP 22/2 are required by 28 July 2022, after which the FCA will consider whether a further consultation is required or whether a further discussion paper would be appropriate.