On 26th May 2022 the FCA published a discussion paper (DP 22/2) seeking views on how the UK listing regime could be further reformed in order to make it more effective, easier to access and flexible. The discussion paper follows on from the FCA's consultation paper (CP21/21) on primary market effectiveness and Lord Hill's UK Listing Review recommendations. One of the potential reforms set out in the discussion paper is the establishment of a new single listing segment for equity shares in commercial companies which would replace the current premium and standard listing segments. The discussion paper also outlines the FCA's view on the role and purpose of the sponsor regime and how it could fit within any wider reforms of the UK listing regime.
These proposals would represent a radical change to the UK listing regime. The standard listing has been seen primarily as the resort of companies that cannot meet the premium listing standards at IPO, many of which have expressed the aspiration to step up later. For a UK commercial company, there is otherwise little attraction to a standard listing, which excludes FTSE index eligibility. It will be interesting to see how FTSE Russell will deal with index inclusion under the new single listing segment. Further thought needs to go into what changes are needed to the current premium listing regime to make it more attractive to high growth technology companies and international issuers. For example, raising the threshold for requiring shareholder approval of significant transactions regime would help improve UK listed companies’ competitiveness in international auctions, but the increase from 25% to 33% is rather modest.
Single listing segment for equity shares in commercial companies
The FCA envisages that the new single listing segment would feature:
a single set of eligibility criteria, based on the current premium listing eligibility requirements;
two sets of continuing obligations for listed companies:
(i) a robust, minimum set of “mandatory” obligations; and
(ii) a further set of “supplementary” obligations that issuers may opt into, following discussion and input from their shareholders;
retention of the sponsor regime – all listed companies in the new listing segment would require a sponsor in the same way as the current premium listing regime;
a disclosure-based regime to financial eligibility requirements, allowing investors to decide whether to invest on the basis of applicable Prospectus disclosures about the quality of the company - FCA proposes to remove (i) the requirement for a three-year representative revenue earning track record; (ii) three years' of audited historical financial information representing at least 75% of the company's business; and (iii) a "clean" or unqualified working capital statement.
Under the proposed single segment, companies would simply be listed in the UK or denoted as having a “UK Listing”, although levels of compliance with continuing obligations would be clearly labelled.
The FCA is seeking views on whether to apply Premium Listing Principles to all listed companies in the single segment.
The single segment would be primarily for equity shares in commercial companies. The FCA would retain separate listing requirements for companies currently listed in its standard listing segment with its current eligibility requirements for, amongst others, secondary listings by overseas companies of equity shares in commercial companies, issuers of debt and debt-like securities, issuers of depository receipts (however the FCA is interested in views as to whether depository receipts should be eligible for listing in the single segment), and SPACs (although the FCA notes that following an acquisition, the combined company would likely need to meet the new eligibility criteria for the single segment regime to list its equity shares on the Official List).
The eligibility criteria for the single segment would be based on the current premium segment eligibility requirements. All issuers listing on the single segment would also be required to appoint a sponsor. The FCA considers whether to replace the current premium financial eligibility requirements, being:
a three-year representative revenue earning track record;
three years of audited historical financial information representing at least 75% of the company's business; and
a "clean" or unqualified working capital statement,
with a disclosure-based regime that would allow investors (i) to decide whether to invest on the basis of applicable Prospectus disclosures about the quality of the company; and (ii) to consider the characteristics of each issuer on an individual basis, setting their own criteria.
Dual class share structures
The discussion paper seeks views on how companies with dual class share structures should be treated under the new regime. One option would be to allow only the form of dual class share structure recently introduced to the premium listing segment in CP21/21. The FCA recognises that this option would remove some of the existing flexibility in the eligibility requirements of the standard listing segment.
Under the single segment, the FCA would re-categorise the continuing obligations in the existing Listing Rules into two groups: a minimum set of “mandatory” continuing obligations and a further set of “supplementary” obligations that issuers may opt into. Obligations under the Market Abuse Regulation and the Disclosure Guidance and Transparency Rules would continue to apply as part of the wider continuing obligations requirements.
Mandatory continuing obligations would include the related party transaction requirements, the rules governing rights issues and open offers (including the maximum 10% discount limit which applies to open offers), shareholder approval for cancellation of listing, pre-emption rights, control of business rules, the rules relating to dealings in own securities and treasury shares, and the comply or explain disclosures relating to corporate governance, climate change reporting and diversity and inclusion.
Supplementary continuing obligations would include the rules regarding significant transactions (including a shareholder vote for reverse takeovers), the controlling shareholder regime and the independent business requirement. With respect to significant transactions, the FCA is also seeking views on the appropriate threshold for Class 1 transactions (as some feedback to CP 21/21 suggested raising the threshold from the current 25% to 33%). The issuers would decide whether to opt into the supplementary continuing obligations during its IPO process. To avoid complexity, issuers would need to opt into all or none of the supplementary continuing obligations.
Whilst the FCA acknowledges the relationship between the premium listing segment and the FTSE UK index series, it also reiterates that setting index inclusion criteria is not a matter directly within its control. The discussion paper states that the FCA has taken into account how index providers may react to the listing regime reforms but such providers may choose to introduce criteria for inclusion that require issuers to adhere to both the mandatory and supplementary continuing obligations and potentially other criteria beyond the listing regime.
The discussion paper states that the FCA considers the sponsor regime key to delivering its desired outcome of promoting broader access to UK equity capital markets. The FCA is, therefore, seeking views as to whether the role and purpose of the sponsor regime should generally remain the same as now but be expanded to all issuers of equity shares in commercial companies on the single segment. The FCA notes that its proposals would extend the sponsor regime to a wider range of issuers.
The extent to which a sponsor would be required after initial listing, as part of fulfilling the continuing obligations of issuers in the single segment, would depend on the chosen design of the new single segment regime (mainly the division between mandatory and supplementary continuing obligations and the application of the sponsor regime within that). For example, the FCA notes that if the significant transaction rules only form part of the supplementary continuing obligations, there may be fewer points during an issuer’s lifecycle at which it would need to appoint a sponsor.
The FCA is also seeking views on potential improvements on the sponsor regime, including a more proportionate approach to record-keeping requirements, the transparency of fee structures, and conflicts of interest.
The discussion paper acknowledges the need to consider how to transition existing issuers into any new single segment regime. This could involve:
Standard listed companies - Transitional provisions would be introduced to allow standard listed companies that are unable or unwilling to meet the obligations within the new single segment to retain their listing in the standard listing segment. Alternatively, those standard listed issuers that wanted to move to the new single segment could undergo an eligibility assessment with the FCA and do so.
Premium listed companies – Such companies and their shareholders would be encouraged to have an open conversation about the supplementary continuing obligations. The FCA suggests that one way of achieving this would be to require a shareholder vote in each premium listed company to determine whether the supplementary continuing obligations are appropriate for them.
The FCA is seeking feedback on the topics discussed in the paper by 28 July 2022. The FCA will then consider whether to issue a consultation paper or a further discussion paper.
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