News Story: Capital markets/Listing regime

On 20 December 2023, the FCA launched Consultation Paper 23/31: Detailed proposals for listing rules reforms (CP 23/31) setting out the FCA's detailed proposals to radically reform and streamline the existing listing regime to strengthen the attractiveness of UK capital markets and support the economy’s growth and global competitiveness (FCA Press Release).

CP 23/31 summarises feedback the FCA has received following publication of CP 23/10: Proposed equity listing rule reforms (CP 23/10) earlier this year, which outlined a blueprint for a new listing regime for equity shares in commercial companies based on a single listing category with reduced eligibility criteria for companies seeking an IPO on the Official List and a simplified continuing obligations regime (see FC Feature 3 May 2023). Notably, the FCA intends to take forward a proposed policy shift to a more permissive, disclosure-based regime. The FCA acknowledges that moving to a simpler framework with reduced regulatory intervention may increase the risk of corporate failures and will result in a rebalancing of investment risk. Given this significant change in regulatory approach, the FCA has engaged extensively with the market to consider whether its proposed overhaul of the listing framework balances the need to encourage a wider range of companies to list on UK markets with adequate investor safeguards and disclosure requirements to preserve market integrity.

CP 23/31 broadly maintains the FCA's approach to reform discussed in CP 23/10 and confirms that the current premium and standard listing segments will be replaced with a new 'commercial companies’ category for equity shares. Reflecting the far-reaching nature of the reforms, the FCA will introduce an entirely new UK Listing Rules sourcebook (UKLR). The first tranche of the draft UKLR covering the core requirements for the new category and sponsors is included in Appendices 1 and 2 CP 23/31. The remaining rules for other categories and provisions that impact all issuers will be published in Q1 2024.

The FCA is working to an accelerated reform timetable and expects the new regime to go live early in H2 2024. The consultation period for CP 23/31 will close on 22 March 2024, including for comments on the currently unpublished second tranche of the UKLR. The FCA aims to publish its policy position and final UKLR at the start of H2 2024, allowing for a period of just two weeks between publication of the final rules and implementation.

Responses to proposed changes to current rules relating to sponsor competence set out in Chapter 18 CP 23/31 are requested by the earlier date of 16 February 2024, as the FCA intends to implement these rule changes ahead of the wider reforms.

Background

A programme of wide-ranging reforms to the listing regime has been underway since 2020, initially driven by the UK's departure from the EU and aimed at creating a framework that will encourage a more diverse range of companies to list and grow on UK capital markets. In July 2021, the FCA opened a broad discussion on the purpose of the listing regime in CP 21/21: Primary Markets Effectiveness Review, which developed wide-ranging recommendations made in the UK Listing Review chaired by Lord Hill and the Kalifa Review of UK Fintech (see FC Feature 5 July 2021 and FCA listing regime, Q&A here). This was followed by DP 22/2, which discussed possible options for structural reform of the listing regime based around a new single segment to replace the existing premium and standard listing categories (see FC Feature 26 May 2022). CP 23/10 developed these ideas and put forward specific proposals for a straightforward listing architecture with simplified admission requirements and continuing obligations for premium listed companies. For further information on the key changes discussed in CP 23/10, see Listing Rules/Reform.

Feedback on CP 23/10

The FCA received nearly 100 responses to the proposals set out in CP 23/10. Alongside the formal consultation process, the regulator engaged widely with the market to inform development of the new regime. Feedback received has reinforced the perception that the UK listing regime should be fundamentally reset to respond to the evolution of global capital markets and confirmed that there is broad support for a more streamlined UK regulatory framework for listed companies. The FCA has reflected carefully on this feedback and provided further detail on its proposals, which include creating a new 'transition' listing category to maintain the status quo for standard listed issuers once the new regime comes into effect.

New commercial companies listing category

The FCA plans to replace the current standard and premium listing segments with a single unified segment for equity shares in commercial companies, referred to throughout CP 23/31 as the 'commercial companies category'. The FCA proposes a single set of rules for this listing category, described in detail in Chapters 4 to 11. Proposals for other categories (shell companies and issuers of non-equity shares and non-voting equity shares) are set out Chapters 12 and 13.

Certain existing core eligibility criteria and ongoing obligations (for example regarding pre-emption rights, the number of shares in public hands and minimum market capitalisation) will be retained under the new single segment. Key changes from the current admission requirements and continuing obligations for listed companies (compared to current premium listing requirements) include those set out below.

• Simplified eligibility criteria to access the Official List – in line with the proposals set out in CP 23/10 (see Q&A here), the current financial criteria, which include a three year financial and revenue earning track record and an unqualified working capital statement, will be removed. The FCA expects that current financial information requirements for a prospectus will remain substantially similar under the new public offers and admissions to trading regime.
• Initial and ongoing obligations on independence and control – Chapter 5 sets out proposals to modify the current rules in LR 6 and LR 9 that require a company to have an independent business and operational control over its main activities. In a departure from CP 23/10 (see Q&A here), the existing mandatory requirement for a written relationship agreement with controlling shareholders will be retained.
• Greater flexibility for dual class share structures (DCSS) – the FCA intends to introduce a more flexible form of DCSS for the commercial companies category. The current mandatory sunset period of five years for enhanced voting rights will be removed, although shares with these rights may only be held by directors, natural persons who are investors or shareholders or employees at the time of first admission to listing (and with such shares subject to restrictions on transfer). Voting restrictions will be retained for certain transactions, including share issues at a discount of more than 10% without a pre-existing authority and votes to approve the cancellation of listing.
• Removal of shareholder vote/publication of circulars for Class 1 and related party transactions – the FCA plans to remove the requirement to obtain prior shareholder approval for Class 1 transactions (except reverse takeovers) and related party transactions (RPTs), as well as the associated obligation to publish an FCA-approved circular to shareholders. Instead, companies will be required to comply with enhanced notification requirements for significant transactions meeting the current Class 1 threshold of 25%, based on the existing notification requirements for Class 2 transactions. Notifications for significant transactions will include some of the more detailed information required for existing Class 1 circulars, including historical financial information on the target and a statement of the effect of the transaction on earnings, assets and liabilities. Working capital statements and sponsor involvement will not be required, along with mandatory announcements for transactions below the Class 1 threshold. The new rules will retain certain existing controls on RPTs, including the requirement for a fair and reasonable opinion (including a sponsor's confirmation) for larger transactions.
• Listing Principles – a single set of Listing Principles will underpin the reformed regime. These will combine the existing Listing Principles for premium and standard listed companies, with some modifications to promote good corporate governance and accountability.
• Modified sponsor regime – under the new regime, the role of the sponsor would be expanded to cover all companies in the single segment. The FCA envisages that the role of sponsors will largely mirror the role they currently have at IPO, with a reduced role following admission. This approach aims to reduce the burden on companies undertaking transactions. The FCA is also proposing changes to sponsor competence requirements as set out in Chapter 18.

The FCA intends to retain the investor protections for premium listed companies set out below and extend them to all companies in the unified segment.

• Rules on pre-emption rights – the existing Listing Rules that control the discount at which further shares can be offered when they are not issued pre-emptively will be extended to all listed companies (see FCA listing regime: continuing obligations, Q&A here), as well as those relating to buybacks.
• Shareholder approval for cancellation of listing – the rules protecting shareholders from the cancellation of a listing in the absence of a takeover offer or approval by 75% of shareholders (see Q&A here).
• UK Corporate Governance Code – the existing Listing Rules for the premium segment relating to the UKCG Code will be extended to all companies. The FRC intends to publish an updated version of the UKCG Code in January 2024, its first revision since 2018 (see FC Feature 7 November 2023).

The reforms are summarised in a table which has been marked up to show additions or changes to the proposals outlined in CP 23/10 (pages 10 to 12).

Implementation and transition

Chapter 16 of CP 23/31 provides further details on the transition to the new regime in line with the FCA's accelerated timetable. For existing premium and standard listed companies, the FCA proposes that:

• existing premium listed companies will be automatically mapped to the new commercial companies category once the new regime goes live; and
• certain standard listed companies will be allocated to a new 'transition' category that would replicate existing standard listing continuing obligations. This new category would be closed to new entrants and have no fixed end date. Companies in this category may apply to transfer to the single segment when and if they wish to do so, and the FCA anticipates that the number of companies in this category will reduce over time. Any proposal to remove the category altogether would be subject to consultation.

In advance of the new regime coming into effect, other existing standard listing issuers such as shell companies and those with a secondary listing will be notified of the relevant category proposed by the FCA.

The FCA plans to retain the existing listing regime for non-equity securities and shares issued by investment vehicles, including open-ended investment companies (OEICs). CP 23/31 sets out proposals for a new listing category for equity shares in shell companies including special purpose acquisition companies (SPACs), which is discussed in Chapter 13.

First published on the Corporate News Service on 20 December 2023.

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