The FCA proposes significant reforms to encourage UK listings

The key reforms being proposed are as follows:

Single listing category

The FCA proposes to introduce a single listing category for equity shares in commercial companies to replace the current standard and premium listing segments. The minimum market capitalisation of £30 million and free float of 10% would remain unchanged.

Eligibility criteria

For companies seeking a listing under the proposed single listing category, the following eligibility rules would be removed:

• a three-year representative financial and revenue earning track record;
• at least three years of audited historical financial information that represents at least 75% of the issuer’s business; and
• any obligation to provide a ‘clean’ working capital statement.

These changes would bring the single listing category more in line with the current standard segment eligibility requirements.

Initial obligations

Independent business and control of business

The FCA is proposing to explore a modified form of the current premium listing rules that require a listed company to demonstrate that it carries on an independent business as its main activity and exercises operational control over the business it carries on. The FCA seeks to accommodate issuers that have operational businesses that generate, or have the prospect of generating, revenue from their own activities or ventures. While the intention is to retain the underlying principle of ensuring a business can comply with the FCA’s listing, disclosure and transparency requirements, the FCA will consider amending existing provisions to be clearer that it is open to diverse business models and, potentially, more complex corporate structures, including franchise-type models or companies making minority investments in other entities.

Dual class share structures

The FCA is proposing to introduce a more flexible approach to dual class share structures (where a company issues two classes of shares with for example different voting and dividend rights) with the following features:

• Enhanced voting rights of sharers held by directors would be exercisable on all matters and at all times, not just to stop a change of control or to protect a founder’s position as a director (as is currently the case). Enhanced voting rights shares would need to revert to one share, one vote to approve the issuance of new shares at a discount in excess of 10%.
• Enhanced voting rights should cease to be exercisable after 10 years and enhanced voting rights shares would convert to ordinary shares with one share, one vote. Currently, the FCA has set a maximum sunset period of five years for the premium segment.
• Restrictions on transfer: The FCA proposes to maintain a modified form of the transfer-based sunset provision currently permitted in a premium listing. This would mean that shares with enhanced voting rights will automatically convert to ordinary listed shares upon the holder ceasing to be a director.

• No specified voting ratio or weighting limits: The FCA proposes removing limits on the maximum enhanced voting ratio that can be attached to enhanced voting rights shares and leave it to the market to negotiate a suitable level.

Controlling shareholders

The FCA proposes to reframe the requirement for a controlling shareholder agreement (i.e. relationship agreement) under a ‘comply or explain’ approach whereby, if an issuer did not put in place such an agreement (which is a requirement under the current premium listing rules), it would be required to make specific disclosures and a discussion of the risks arising from having a controlling shareholder in the prospectus and annual financial report. The FCA also proposes to introduce a requirement for a market notification if such an agreement is altered post-listing.

Continuing obligations

Significant transactions

The FCA proposes to:

• retain the requirement to make an announcement’ at the time of entering into a ‘Class 2’ transaction but only at the current Class 1 threshold of 25% rather than at the current Class 2 threshold of 5%;
• remove the current Class 1 obligations to obtain prior shareholder approval of the transaction (except for a significant transaction that constitutes a reverse takeover); and
• remove the ‘profits test’ currently used to classify significant transactions and allow sponsors more discretion to apply appropriate modifications to the class tests without having to submit a request for the FCA to modify such tests.

Related party transactions

The FCA proposes to:

• remove the requirement for approval by independent shareholders of related party transactions at or above the 5% threshold;
• remove the requirement for approval by independent shareholders of related party transactions involving a controlling shareholder below the 5% threshold; and
• remove the modified requirements for smaller related party transactions above 0.25% and below 5%.

Cancellation of listing

The FCA proposes to retain the current premium listing requirement for a shareholder vote to cancel listings of shares in the single listing category, including the 75% majority requirement (and additional requirements where a controlling shareholder is involved). It is proposed that this vote be supported by an FCA-approved circular and that the existing notice period of 20 business days following shareholder approval be retained.

Single set of listing principles

As a result of creating a single listing segment to replace the premium and standard listing segments, the FCA also proposes to set one set of Listing Principles by combining the current Listing Principles and Premium Listing Principles. In creating a single set of Listing Principles, where necessary modifications or exceptions would be tailored to address differences between issuer and security types, rather than by virtue of premium or standard categorisation. The FCA will provide further detail on the application of the combined set of Listing Principles and where modifications and exceptions would apply in their follow-up consultation.

Next steps

The FCA has invited feedback on reform proposals until 28 June 2023 and aims to issue a further consultation on these proposals and the wider proposed changes to the regime in the autumn. While the FCA is aiming for ‘an accelerated timetable, with substantial progress by the end of 2023’,  there is no specific timetable for the amendments to come into effect.

Our view

We welcome changes to the rules that help to simplify the listing regime, allowing directors to focus on the running of their listed businesses while providing shareholders with a clearer and more accessible market. We will continue to monitor the proposals and will provide updates as the FCA progresses its consultation.

How we can help

Our team has a wealth of experience in the capital markets sector. Should you have any questions, please contact Partners in our Equity Capital Markets team Nick Davis and Robert-Bines Black or Associate Ravina Mahajan.

Disclaimer: We at Memery Crystal (and our parent company RBG Holdings plc) support and encourage free/independent thinking in relation to issues which are sometimes considered to be controversial subject matters. However, the views and opinions of the authors do not necessarily reflect the opinions, views, practices and policies of either Memery Crystal or RBG Holdings plc.