Significant changes to UK's listing rules
The Financial Conduct Authority (FCA) has introduced significant changes to UK's listing rules, with the aim to make UK’s financial markets more accessible, efficient and attractive. The new rules will be in effect from 29 July 2024.
The key changes detailed below, with a focus on financial preparation implications for companies, have been introduced by the FCA to achieve its objectives of improving the attractiveness to investors of the UK equity capital markets:
- Replacing the current premium and standard listing segments into a single segment for equity shares in commercial companies referred to as "equity shares (commercial companies)" or “ESCC”. The AIM market, operated by the London Stock Exchange, remains unaffected by these changes. This promotes inclusive eligibility for smaller and high growth companies which may have been previously unable to enter the UK capital markets due to the stringent requirements for a premium listing. Importantly, all listed companies are subject to the same high standard of disclosure and governance, ensuring robust investor protection across the board.
- Removal of mandatory votes on significant transactions and related party transactions for commercial companies and moving to a more disclosure based regime. However, if the transaction includes issue of new shares, a publication of a prospectus and therefore preparation of the relevant financial information might still be required under the prospectus rules (which are currently under consultation). Furthermore, shareholder approval will still be required for major decisions including reverse takeovers and delisting. This will streamline decision-making and enhance companies' agility to respond to market changes and opportunities. Additionally, companies will benefit from lower transaction costs by avoiding the preparation of circulars for shareholder votes.
- Relaxed eligibility criteria for companies seeking to list in the UK including more flexibility for dual shares structures, reduction of free float held by public at the time of listing and removal of previous premium listing requirement to demonstrate three year revenue track record and a clean working capital statements. The reduction in free float and any enhanced voting rights will enable founders and early investors to retain greater control and ownership of the company post IPO- ensuring alignment with the company’s strategic direction.
- Increased flexibility on listing rules for SPACs and shell companies whilst ensuring investor protection. This will improve SPAC attractiveness as a listing vehicle in the UK market.
This reform followed an extensive market consultation, with the FCA balancing an increased risk tolerance necessary with a need for economic growth.
We welcome the positive change the new listing rules are looking to achieve just in time for the revival of the IPO market. Market practice, particularly for listed entities, will take some time to evolve, and we are really looking forward to supporting companies in interpreting and putting these new rules in practice to help achieve their strategic objectives.
Previously companies chose to list either within the Standard or Premium segment of the main market.
Under the new rules, the main market replaces both segments into a single segment for commercial company equity shares.
Companies would have been required to have at least 25% of their shares in public hands at the point of listing. However, this has now reduced to 10%.
The new rule removes the minimum requirement in relation to presentation of three years historical financial information. However, if a company has existed for 3 years and over, historical financial information for 3 years would need to be presented. This simplified approach aims to provide more flexibility for issuers such as high growth and pre revenue entities to join the ESCC. Additionally, the investors will still receive detailed historical financial information where available.
There is no longer a requirement for an IPO applicant to make a "clean" / unqualified working capital statement to be eligible for listing, however a working capital statement is still required in the admission prospectus (the rules for which are currently under consultation).
Current specific prospectus regime disclosures will still be required on:
- Acceptable accounting policies
- Duration of historic financial information to the extent available
- Additional information relating to issuers with a complex financial history; and
- Disclosure requirements around qualified working capital statements
Sponsors, typically investment banks, must be appointed for all companies seeking to list on the Official List.
They must still confirm the applicant's compliance with Listing Rules and transparency requirements.
The role and responsibilities of sponsors remain largely unchanged, ensuring continuity in due diligence processes.
As per new listing rules, the board of listing applicants will be required to submit on admission a statement that the company has appropriate systems and controls to ensure compliance with ongoing obligations under the listing and corporate governance rules.
All companies seeking a listing on the UK main market will now be required to comply or explain non-compliance with the UK Corporate Governance Code. This will impact companies which would previously have been standard listed (premium listed were already in scope). Standard listed companies that choose to continue in the transition category are not required to comply.
The new disclosure-based significant transactions regime for transactions meeting the 25% threshold (based on class test) replaces the requirement to seek prior shareholder approval. This change shifts the responsibility of deciding whether to enter into significant transaction from shareholders to the board of directors.
For significant transactions, the new rules require to make the following notifications:
- Initial disclosure - an overview of the transaction and the company's reasons for entering it must be announced as soon as possible after terms are agreed, including statement from board that the transaction is in the board’s opinion, in the best interests of shareholder. This is largely similar to the class 1 and class 2 announcements with some degree of enhancements
- Enhanced disclosure - certain additional non-financial information (including material contracts and significant litigation) and historical financial information (2 years only) for disposals must be released as detailed below. Pro forma financial information disclosures remain voluntary. If companies choose to publish them, they no longer need to comply with prospectus regulations
- Announcement to confirm the completion of a significant transaction, and that, except as disclosed, there has been no material change affecting any matter contained in the previous announcements
Disposals:
New rules replace the requirement to publish three years of historical information with two years of unaudited (audited if available) historical financial information of the target business and publication of certain non-financial information.
Where the financial information for the target of a disposal is not available or cannot be produced in accordance with the relevant requirements, the listed company must publish:
- a statement by the board that the information is not available or cannot be produced
- an explanation as to how the value of the consideration has been arrived at; and
- a statement by the board that it considers the consideration to be fair as far as the security holders of the company are concerned
Acquisitions:
For acquisitions, a notification to shareholders is required in line with disclosures explained above that should include details of the transaction, rationale for the company undertaking the transaction, description of the target, consideration, benefits and opportunities of the transaction. Further new rules eliminate the requirement to publish three years of audited financial statements of the target.
Given the range of options the new rules give to the board, we expect this will take some time for consistent market practice for acquisition announcements.
Under the new regime, there is no requirement for shareholder approval, however the company would need board and sponsor approval as well as a market announcement for transactions exceeding a 5% threshold.
For reverse takeovers rules will largely be aligned with the previous listing rules, which includes a market announcement, shareholder approval, an FCA-approved circular (including historical financial information) and appointment of sponsor to assess whether there is a reverse takeover and for any admission prospectus for new enlarged issuer.
The new ESCC category retains most former premium listing requirements, including:
- Pre-emption rights, offering shares in proportion to existing holdings
- Restrictions on offering shares at more than a 10% discount to market price without shareholder approval (unless via a rights issue)
- Procedures for rights issues, open offers, vendor consideration placings, offers for sale or subscription
No substantive changes to these important shareholder protections. Dual-class share structures cannot use weighted voting rights to approve share issuances at greater discounts.
Listed companies currently operating within the Standard segment of the market.
The Transition category has been created to enable existing standard segment companies to maintain the status quo for the time being, and its rules are based on the current standard segment rules. No other companies will be able to join the Transition category and while it has no set end date, the FCA may consider closing it in the future.
Issuers in the Transition category that undertake a reverse takeover, need to transfer to another category in order to retain their UK listing.
Starting 29 July 2024, companies in the Transition category can apply to transfer to the new commercial companies category using the modified transfer process.
The modified process includes an eligibility assessment focused only on additional requirements, without reassessing criteria previously met at the original admission to listing. This would imply that, since the minimum market capitalisation requirement is an existing eligibility criterion applicable to all issuers, it would not be re-assessed as part of the modified transfer process.
This process requires appointing a sponsor to undertake a targeted sponsor service, focusing only on additional obligations. The sponsor must confirm that it has not identified any adverse information suggesting the issuer would be unable to comply with the commercial companies category listing requirements.
While rules for closed-ended investment funds, including REITs and Investment Trusts, have been aligned with the relaxed regimes for ESCCs, additional rules account for their distinct features.
- Transactions complying with a closed-ended fund's published investment policy are exempt from significant transaction and reverse takeover rules. However, shareholder approval is required for reverse takeovers that is not covered within the scope of the fund’s investment policy and a disclosure regime to be followed in the event of a significant transaction outside the fund’s investment policy
- Changes to investment manager fees require a sponsor's "fair and reasonable" opinion and possibly shareholder approval
In the event that a closed-ended investment fund engages an external Alternative Investment Fund Manager (AIFM) and the AIFM has the same director as that of the closed-ended fund, the new rules do not prevent the director from being independent.
A new listing category for SPACs and other shell companies has been introduced, based on previous standard listing requirements with modifications. These companies must complete their initial transaction within 24 months of listing, extendable by up to three additional years with shareholder approval.
The provisions offer flexibility for SPACs, preserving previous changes while allowing for extended timeframes with appropriate approvals.
A sponsor will have to be appointed in the event of an issuance of a prospectus or any documents under the Prospectus Regulation, reverse takeovers, confirmation that the entity is operating in accordance with the listing rules.
This category applies to companies seeking a secondary listing in the UK wherein the domestic laws of the market in which the company hold a primary listing or post IPO rules from their primary listing make it difficult to meet the rules of the Commercial Company category listing.
UK incorporated companies seeking a secondary listing in the UK cannot seek to list under this category albeit a secondary listing can be sought within the Commercial Companies category.
For companies seeking to list within this category, they would need to meet the eligibility requirements and adhere to the continuing obligations under a standard listing, with the following amendments:
- The applicant’s place of central management and control must either be in the country of its incorporation or country of its primary listing
- The Company must be in compliance with the listing rules of its primary listing and the admission of shares to the UK markets must be of the same class
