Changes to the Listing Rules: protecting minority shareholders' rights in premium listed companies

United Kingdom

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

Changes are expected to the Listing Rules regarding the rights of minority shareholders in premium listed companies that have a controlling shareholder. In response to concerns in the investment community over the interests of minority shareholders, the FCA began a review of the effectiveness of the Listing Regime in October 2012. Subsequently, near-final proposals for measures to protect minority shareholders rights in premium listed companies with a controlling shareholder were published in November 2013 (the full consultation paper can be accessed here). With implementation scheduled for mid-2014, such companies should understand how and when they will be affected.

Summary of key proposals

The proposed protections to minority shareholders include:

Mandatory agreement between the company and controlling shareholder

This agreement is aimed at ensuring independent operation of the company from the controlling shareholder through the inclusion of certain fundamental independence provisions (for example, an undertaking that transactions and relationships with the controlling shareholder (and/or any of its associates) will be conducted at arm's length and on normal commercial terms).

Premium listed companies will be given six months to bring themselves into compliance once the requirements come into force in mid-2014. A similar period is proposed for companies that acquire a controlling shareholder post-admission.
Additional measures will be activated, giving minority shareholders rights to vote on, and veto, all transactions between the controlling shareholder and company, if:

  • the company fails to implement the mandatory relationship agreement before this deadline;
  • the company fails to comply with such a relationship agreement that has been put in place; or
  • an independent director does not agree with certain statements made in the annual report as regards compliance with the mandatory relationship agreement.

The additional measures would remain in effect until the next annual report in which the board gives a clean statement of compliance for the entire preceding financial year and the independent directors do not dissent.

Additional voting powers for minority shareholders when electing independent directors

This proposal aims to ensure that minority shareholders have a greater say in appointing independent directors; an important source of control within the governance structure of a listed company.

Premium listed companies with a controlling shareholder will need to ensure that their constitutions provide for the election of independent directors by a dual voting structure. With this structure, independent directors are separately approved both by the shareholders as a whole and the minority shareholders as a separate class. If the necessary majorities are not achieved in the dual vote, the company would be required to wait at least a further 90 days before the vote could be passed by a simple majority of all shareholders.

Once implemented, companies will have until the next general meeting for which a notice has not yet been given to comply with these requirements.

Enhancing minority shareholder voting power in cancelling premium listing

The protections of the premium listing regime fall away after a listing is cancelled. This provision is aimed at ensuring that minority shareholders are given a proper say in any decision as to cancellation, as with cancellation significant rights of participation in the governance of the company are removed from shareholders.
It is proposed that for cancellation of a premium listed company's premium listing, the approval of a majority of votes of the independent shareholders would be required.

This is presented as an alternative by the FCA to the retention of the existing arrangements whereby any premium listed company wishing to delist must first obtain the prior approval of holders of 75 per cent of its shares in a general meeting. These two options are currently being presented for consultation.

Will the minority shareholder protections affect the level of free float?

The percentage of shares required to be in public hands (or free float) is currently 25 per cent. This is not proposed to change. Furthermore, the FCA is proceeding with their proposal to accept lower levels of free float in the standard segment where they are satisfied sufficient liquidity exists for the market to be able to operate properly.

Further transparency enhancement

It is proposed that other transparency requirements be enhanced for premium listed companies:

  • companies announce smaller related party transactions as soon as possible rather than waiting for the next annual report; and
  • a requirement is introduced that any disclosures required by the Listing Rules should either be in a single identifiable section in the annual report or that a cross-reference list to where the disclosures may be found is included.

Any information contained in this article is intended as a general review of the subjects featured and detailed specialist advice should always be taken before taking or refraining from taking any action. If you would like to discuss any of the issues raised in this article, please get in touch with your usual Olswang contact. This article was included in our Equity Capital Markets Update Q4 2013.