The UK Financial Conduct Authority (the “FCA”) on May 3, 2023, published consultation paper CP23/10 (the “Consultation Paper”), which sets out the FCA’s proposals to significantly reform the UK’s equity listing regime. The Consultation Paper contains the FCA’s blueprint for changes to the rules that apply to issuers who wish to list in the UK to attract a more diverse range of applicants and bolster UK competitiveness while maintaining high standards of disclosure and transparency. The Consultation Paper follows the FCA’s discussion paper (DP22/2) published in May 2022 seeking views on reform of the UK listing regime. Our OnPoint is available here.

New single listing category for equity shares

Central to the FCA’s proposals is the creation of a new single listing category for equity shares in commercial companies, replacing the current distinction between premium and standard listings. The proposals aim to simplify the current regime, improving the attractiveness of listing in the UK and providing a wider range of investment opportunities for investors.

Key proposed changes

The key proposed changes are:

• Removal of three-year track record and ‘clean’ working capital requirements: Eligibility rules requiring a three-year financial and revenue earning track record as a condition for listing and the requirement for a ‘clean’ working capital statement would no longer be needed. However, historical financial disclosures in the prospectus would still be required.
• Simplification of independent business and operational control of business rules: Eligibility and ongoing rules requiring that a company has an independent business and has operational control over its main activities would be modified, to create a more permissive approach to accommodate a range of business models and structures.
• Modification of controlling shareholder ‘comply or explain’ rules: Rules requiring listed companies to either conclude a shareholder agreement with a controlling shareholder or make specific disclosures would be modified, such that failure to comply with these rules would no longer result in the loss of related party transaction exemptions.
• Flexibility in dual class share structures: Rules would be introduced permitting a more flexible approach to dual class share structures. This would enable founders (where they are directors) to hold shares with specific voting rights, except in respect of the issue of new shares at a discount greater than 10%. These specific voting rights may be held until an extended sunset period of 10 years expires.
• Removal of compulsory shareholder votes and shareholder circulars for significant transactions: Shareholder approvals would only be mandatory in respect of reverse takeovers. Class 1 transactions would be required to make only a market announcement, and no requirements would apply below the 25% Class 1 threshold. A sponsor declaration would no longer be needed, and the rules would provide sponsors with greater flexibility to modify the applicable classification rules tests.
• Removal of compulsory shareholder votes and shareholder circulars for related party transactions: Shareholder approvals would no longer be required for related party transactions. However, where such a transaction exceeds the 5% class test threshold, companies would need to make a specific announcement after obtaining advice from a sponsor.
• Modification of existing sponsor regime: Sponsors would be required to provide the FCA with assurances at listing in relation to due diligence on a company’s compliance with the single listing segment’s new eligibility requirements. However, it is anticipated that sponsors would play a reduced role post-listing. The FCA will consider further changes to the sponsor regime in due course.
• Addition of other listing categories: A separate category for SPACs would be incorporated under the new single listing segment. Overseas companies currently on a ‘standard’ listing may also have access to a new ‘other shares’ category. The FCA has proposed no changes to the non-equity security listing rules as part of this consultation, however, a review of the public offers and admission to trading regime remains ongoing.

Our thoughts

The proposals are largely consistent with the FCA’s original proposals in May 2022 and, if implemented, would represent the most significant change to the UK listing regime in decades.

Overall, the proposals are a positive step towards simplifying the UK listing regime while maintaining high standards of market integrity and consumer protection. However, while these proposals may make the UK a more attractive listing venue, it is clear that key issues that steer companies away from the UK and towards a listing in the United States remain unresolved, including the valuation gap between the UK and the United States and the larger pool of institutional capital available to those accessing U.S. investors, as compared to UK investors. The FCA recognizes that to compete globally, a holistic set of reforms will be required that go beyond the proposals in the Consultation Paper.

Furthermore, despite the generally positive market reaction to the Consultation Paper, it is clear that certain questions regarding the implications of the proposals on investors’ rights will need to be considered and reflected upon during the consultation period.

Next steps

The FCA is consulting for eight weeks until 28 June 2023. Following the consultation period, the FCA intends to release a further consultation on the wider proposed changes to the UK listing regime by autumn 2023, which will include a draft of the proposed listing rules. The FCA will also finalize its proposals for a transition period to facilitate market integration of the new rules.