A higher Standard?

Introduction

Last week, the FCA published the latest feedback on its ongoing Primary Markets Effectiveness Review. This has important consequences for companies listed, or planning to list, on the Standard or Premium Listing Segments of the LSE’s Main Market.

Post-BREXIT, the FCA has been examining the UK’s public markets and has been consulting on changes to make the markets that it supervises more effective. We have already seen changes to the eligibility requirements for Main Market listed companies (including an increase of the minimum market capitalisation to £30m and a decrease of the required free float to 10%); as well as a promised reduction of the burden of producing a prospectus for certain secondary fundraisings and pre-emptive offers.

The stated aim of this latest discussion paper is to seek to remove complexity around listing, promote broad access to listing for a wider range of companies, empower investors to make their own decisions over the suitability of listed companies to meet their investment needs and allow listed companies and investors flexibility to agree where additional shareholder engagement is appropriate.

The key proposal, which is now subject to consultation, is to remove the distinction between a Standard Segment listing and a Premium Segment listing. This would create a single ‘UK Listing’ segment for equity shares in commercial companies, meaning a single set of eligibility requirements and a requirement for all companies to retain a Sponsor. However, companies could choose between following a mandatory set of continuing obligations or opting in to additional more stringent continuing obligations – this to a large extent mirrors the existing differences between a Standard Segment and Premium Segment listing.

Background to the proposals

One of the perceived failings of the existing Standard Segment is that it is seen by some as being too lax, and in fact inferior to AIM and AQUIS in respect of eligibility requirements and ongoing obligations. This is exacerbated by the lack of any requirement to appoint a Sponsor, whether on listing or for any material transactions. Broadly, Sponsors for Premium Segment companies are seen as providing value and protection to investors, and both AIM and AQUIS require the ongoing retention of a Nominated Adviser or Corporate Adviser to oversee quoted companies.

These deficiencies of the Standard Segment put off many investors and companies. In contrast, the requirements for a Premium Segment are seen as enhancing London’s reputation as a prestigious international listing venue, with the highest standards of governance, albeit often prohibitive for smaller, growth companies. Accordingly, Premium Segment companies are eligible for inclusion in the indices.

For context, it is important to understand that the Standard Segment is currently predominantly used by issuers of debt securities. Only a small minority of Standard Segment listings are of shares in commercial companies. Many of these are secondary listings of companies with an existing overseas listing. The Standard Segment was always intended to impose the minimum EU regulatory requirements, with the Premium Segment having additional regulatory burdens more suitable for ‘blue chip’ companies. Following BREXIT, this differentiation is less relevant and arguably merging the two listing segments for commercial companies is unlikely to be a significant impediment to listing.

The proposed new ‘UK Listing’ segment

What the FCA is now proposing, subject to consultation, is to blend the two segments into one, but to retain some flexibility. Having two segments available to Main Market companies, particularly where there are alternatives like AIM and AQUIS, is seen as creating complexity – not to mention the reputational issues attaching to a Standard Segment listing, outlined above. AIM and AQUIS both provide a suitable framework for smaller, growth companies who benefit from having a retained Nominated Adviser or Corporate Adviser to assist them with regulatory compliance. The FCA is clearly positioning this new segment as having the highest standards of transparency, corporate governance, and shareholder engagement, albeit with some degree of flexibility to accommodate companies of different sizes and stages of development.

This new ‘UK Listing’ segment would have the following attributes:

• A single set of eligibility criteria, essentially seeking to replace complex and sometimes confusing prescriptive criteria with a more disclosure-based approach, including potentially:
  
  

  • removing financial eligibility requirements (such as a three-year audited track record) and replacing it with a prospectus disclosure regime so that investors can draw their own conclusions as to a company’s suitability.

  • allowing companies to list with a qualified working capital statement – currently this is an option for Standard Segment listings but not for companies applying to the Premium Segment, who must have a ‘clean’ working capital statement.

  • applying the current higher additional listing principals for Premium Segment companies to all companies, promoting a higher standard of corporate governance.

• A robust, minimum set of continuing mandatory obligations with companies having a choice to adopt further additional supplementary obligations. These would all be in addition to the existing obligations under the Market Abuse Regulation and the Disclosure Guidance and Transparency Rule sourcebook, so companies will still have to look to several sources to understand their regulatory obligations.
  
  

  • The mandatory continuing obligations would focus on transparency and shareholder protection.

  • The supplementary continuing obligations would be those existing Premium Segment requirements that provide enhanced shareholder protection, including controls over significant transactions.

The FCA proposal is short of detail but, whilst this looks a lot like the existing Standard/Premium differentiation, they are keen to highlight their intention that the division is intended to be narrower than that which exists at present. This appears to us to be a raising of the basic requirements for a Standard Segment listing rather than a lowering of the requirements for a Premium Segment listing, with the mandatory obligations being somewhere in between.

• A requirement for all companies to retain a Sponsor on listing and for material transactions. This essentially applies the existing Premium Segment listing requirement for a Sponsor to all companies in the new segment.
• As already required, a minimum market capitalisation of £30m and a minimum free float of 10%.

Curiously, the FCA state that they would retain the regime that currently applies to Standard Listed companies for secondary listings of commercial companies that are incorporated overseas. This would seem to facilitate dual listings, which have been a popular use of the Standard Segment, suggesting that for dual listed companies the option to use the Standard Segment would remain. It may well be that the new regime is therefore irrelevant to companies seeking a dual listing, who often appreciate the lighter touch of the Standard Segment listing where they already have stringent continuous obligations on their home exchange. Coupled with the potential easing of the prospectus requirements for secondary fundraisings, it appears to us that London may become more attractive for dual listings notwithstanding the FCA’s current proposals.

The FCA has opened to debate the question as to whether the Class 1 circular regime for significant transactions is still fit-for-purpose. Criticism of this regime centres around the length of time it takes to prepare and send a Class 1 circular and to obtain shareholder approval, often introducing delay and uncertainty into transactions and therefore putting listed companies at a commercial disadvantage, particularly in competitive situations. Whilst the regime itself is likely to remain, it is possible that the thresholds for determining a Class 1 transaction may be adjusted.

Finally, the FCA is consulting on some potential changes to the Sponsor regime, including record-keeping, conflicts of interest and fee structures. These are largely to promote efficiencies. All in all, given the proposal that all applicants for the new ‘UK Listing’ segment will require a Sponsor, the reforms should be good news for Sponsors generally.

It is likely that transitional provisions will be provided – companies with an existing Standard Segment listing who do not comply with the revised requirements will not automatically be delisted but would probably remain in the Standard Segment rather than automatically being moved to the new ‘UK Listing’ segment. There will therefore be a period where some companies will remain on the Standard Segment. It is envisaged that companies with an existing Premium Segment listing may be required to have a shareholder vote as to whether to adopt the additional ‘supplementary’ obligations as well as the basic ‘mandatory’ obligations.

What does this all mean in practice?

Whilst the detail is not clear at this stage, if these proposals come into effect there is a good chance that the new ‘UK Listing’ segment could attract better quality companies than the existing Standard Segment, removing the stigma attached to that segment and increasing investor confidence. The changes seem to us to be a further step in the direction of encouraging earlier stage, growth companies to a listing on AIM or AQUIS, which have ongoing supervision by Nominated Advisers and Corporate Advisers and making the Main Market more attractive to established companies whilst retaining the flexibility for larger growth companies to use it should they wish to. The retention of the Standard Listing for dual-listed companies would be a welcome exception, as it could provide a lighter-touch regime where companies are already compliant with the rules of a recognised overseas exchange.

The consultation period ends on 28 July 2022, following which the FCA will provide feedback and consider whether to issue a consultation paper or a further discussion paper. It is therefore clear that any changes will not happen in the short term.

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