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On January 26, 2012, the Financial Services Authority (the FSA) in its capacity as the United Kingdom Listing Authority (the UKLA) published a consultation paper (CP 12/2) (the Consultation Paper) that sets out certain proposed amendments to the Listing Rules (the Listing Rules or LR), the Prospectus Rules, and the Disclosure and Transparency Rules (the DTRs). Many of the proposed changes are technical in nature and are meant to reflect recent changes in market practice, while others are an attempt to codify into the formal body of the Listing Rules relevant material that already exist within the Technical Notes on the Listing Rules issued by the UKLA. The proposals relate to the following areas:
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reverse takeovers (LR Chapter 5);
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sponsors (LR Chapter 8);
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financial information (LR Chapters 6 and 13);
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transactions (LR Chapters 10, 11 and 12); and
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externally managed companies (LR Chapter 6, DTR 3.1 and Prospectus Rule 5.5).
The FSA also is seeking comments on some wider issues in relation to the premium listing category (Premium Listing). The deadline for providing comments on the Consultation Paper to the FSA is April 26, 2012.
Reverse Takeovers
In order to prevent the use of the reverse takeover regime as a backdoor route to obtain a listing, the FSA is proposing to narrow the current exemption (where the acquisition of one listed company by another is not treated as a reverse takeover) such that only acquisitions by a listed issuer of another listed issuer in the same listing category will not be treated as a reverse takeover. For situations where, however, the reverse takeover regime would be applicable, related proposals aim (i) to reduce the information requirements that need to be met in order to avoid a suspension and (ii) to reduce certain of the eligibility requirements following the cancellation of a listing (after the completion of a reverse takeover).
Sponsors
The proposals relating to LR 8.2.1 aim to clarify that sponsors will be understood to be providing a “sponsor service” in all circumstances where they provide any key confirmation or assurance to the FSA. The FSA also proposes to widen the ambit of the term “sponsor services” so that a sponsor would need to be appointed for other services provided to issuers having a Premium Listing, such as in connection with reverse takeovers.
In relation to the role and responsibilities of sponsors, the key proposals are:
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the extension of LR 8.3.1 so that sponsors are required to provide the FSA with any explanation or confirmation that the FSA reasonably may require;
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a strengthening of the rules for sponsor communications, for example to oblige sponsors to take all reasonable steps to ensure that communications to the FSA by them (and made in their capacity as sponsors) are accurate and complete;
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introducing a specific “Principle for Sponsors” that will require sponsors to act with honesty and integrity in relation to a sponsor service; and
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a clarification of LR 8.3.7 to require a sponsor to take all reasonable steps to identify conflicts of interest that could adversely affect its ability to carry out its obligations under LR 8.
Further, with a view to ensuring that the FSA receives promptly any information that may have an impact on a sponsor’s compliance with the regime, a number of changes to the notification requirements under LR 8.7.8 have been proposed which include (i) a notification obligation regarding any information that the sponsor reasonably believes could adversely affect market confidence in the sponsor regime and (ii) a notification obligation in the event that there is an unexpected change in the financial or trading position of the sponsor (or its group of companies) that could affect its ability to provide sponsor services.
Financial Information Requirements
The majority of the proposals related to LR Chapters 6 and 13 (which set out requirements for financial information to be provided by issuers who are seeking a Premium Listing and which is to be included in circulars issued by issuers with a Premium Listing to their shareholders, respectively) aim to codify existing practice. Broadly, the proposals are:
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to clarify the application of LR 6.1 in relation to the track record requirements for issuers seeking a Premium Listing;
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to include detailed requirements in LR 13.5 for the disclosure of financial information for Class 1 transactions and disposals of interests in undertakings that are not or have not been consolidated. For example these include the following:
(a) Unconsolidated targets – (i) where the acquisition or disposal of a target has been or will be accounted for as an investment and such target has been admitted to a regularly functioning market, the share prices and dividend history of such target can be provided in place of financial information; and (ii) for an acquisition of a minority interest in a company that will be equity accounted for and that has not been admitted to a regularly functioning market, a financial information table accompanied by a reconciliation to the issuer’s accounting policies and an accountant’s opinion (or alternatively a director’s statement that no material adjustment needs to be made to achieve consistency), together with an explanation from the directors in relation to the proposed accounting treatment for the target in the issuer’s future consolidated accounts would be required;
(b) Mineral reserves – where a mineral company having a Premium Listing is acquiring another mineral company which also has a Premium Listing, the FSA has proposed that it would be permissible for the acquiror mineral company to provide certain selected mineral information (such as details of mineral resources, anticipated mine life, the duration and main terms of any licences , etc.) in lieu of a mineral expert’s report, provided that such information is presented in accordance with a reporting standard that is acceptable to the FSA; and
(c) Valuation reports – the proposal is to amend LR 13.5.3CR to clarify that in instances such as the acquisition of tangible and intangible assets or an investment that is not admitted to an investment exchange, where financial information may be unavailable or inappropriate, a valuation report is required to be provided;
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to increase the disclosure requirements for figures relating to synergy benefits (LR 13.5); and
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to widen the scope of LR 13.5.27 to allow targets admitted to certain multilateral trading facilities (MTFs) and investment exchanges to take advantage of reduced information requirements.
Transactions
The proposed changes to LR Chapters 10, 11 and 12 in relation to transactions also relate largely to the codification of existing practice already contained in the Technical Notes to the Listing Rules issued by the UKLA. The main proposals are as follows:
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to introduce the concept of supplementary circulars into the Listing Rules in order to allow issuers to provide further information to shareholders in certain circumstances, to enable shareholders to be better informed prior to the exercise of their votes;
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to clarify the FSA’s approach to break fees, in particular confirming that it is the substance of the arrangement that is of relevance rather than the legal form itself; and
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to remove the concept of a Class 3 transaction and the notification requirements for the same, thus allowing issuers to be governed by the requirements set out in DTR 2 (which requires the announcement by issuers of inside information where the relevant criteria is satisfied). The FSA states that the above has been proposed based on the view that by their very nature, such transactions (currently classified as Class 3 transactions) are not material and the notification obligations under the existing LR 10.3 do not add any additional value above the disclosure obligations set out in DTR 2.
Externally Managed Companies (also known as Special Purpose Acquisition Companies or SPACs)
Certain proposals have been made as a result of the recent listing of cash shell companies (also known as SPACs) on the standard segment of the London Stock Exchange (Standard Listing). Many of these companies have outsourced several significant management functions (such as the formulation of strategy, decision making in relation to target identification, etc.) to offshore advisory companies. The proposals are designed to address the concern that, where such a structure has been used, the FSA does not have sufficient reach over the real management of such companies as they are placed beyond certain key controls set out under the listing regime, which in turn reduces the ability of shareholders to hold the real management of such companies to account.
The two key proposals are:
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to make the principals of the advisory firm responsible for any prospectus published by the externally managed company and to make the principals subject to the DTR requirements in relation to disclosure of share dealings in the company’s shares by persons discharging managerial responsibilities (PDMRs); and
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to include new rules and guidance in LR 6.1 to state that externally managed companies cannot obtain a Premium Listing. The FSA believes that this would give the relevant companies the choice between adopting a more conventional corporate structure with the management of the company represented on the board or moving to a standard listing or an unregulated market.
Premium Listing – Wider Issues
In the context of what the FSA calls a fundamental discussion in recent months about whether the Premium Listing standard generally needs to be further enhanced, the FSA has elected to clarify its position with respect to the following issues as part of the “Overview” section of the Consultation Paper:
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Free-float requirements – it has been pointed out that the free float requirements are derived from Article 48 of the Consolidated Admissions and Reporting Directive (2001/34/EC) and are explicitly drawn in relation to liquidity, rather than governance, issues. The FSA has clarified that it is therefore not possible for these requirements to be used by the FSA to decide whether any specific issuer is suitable for listing or not;
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Governance arrangements and FTSE (FTSE) indexation – in relation to the concern that certain investors are forced to buy securities of non UK issuers (who may not have an effective governance arrangement) by virtue of their shares being included in certain FTSE indices, the FSA has stated that the criteria for inclusion in the FTSE indices are not within the regulatory perimeter, but are instead entirely and solely for the FTSE itself to determine, taking into account the views of market participants; and
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The relationship between the UK Corporate Governance Code (the Code) and the Listing Rules – in connection with the same, the FSA has highlighted that the responsibility for the content of the Code lies with the Financial Reporting Council (FRC) and that the Listing Rules only require (for issuers having a Premium Listing) the inclusion of a “comply or explain statement” in an issuer’s annual financial report.
However, the FSA acknowledges that the Listing Rules are an integral element of the overall corporate governance architecture and therefore are seeking views from market participants and other stakeholders on the following: (i) whether the Premium Listing standard, as set out in the Listing Rules, remains correctly positioned as a benchmark of high standards; and (ii) whether there are specific enhancements to the Listing Rules that may be desirable in terms of providing additional protections to investors. In this regard, potential areas for consideration that have been identified are as follows:
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enhancing the rights of minority shareholders by giving them rights of veto over particularly important resolutions such as the election of directors;
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reinstating/strengthening the former requirements that set as conditions of listing that companies with controlling shareholders must be capable of carrying out their business independently of the controlling shareholder(s);
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introducing a new free-float requirement that effectively allows minority shareholders to determine the governance arrangements of the company; or
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strengthening the related party transaction requirements/disclosures.
Timeframe
The consultation period closes on April 26, 2012, and the FSA intends to publish its feedback and policy statement during the summer of 2012 with the relevant rules coming into effect shortly afterwards. With regard to the wider issues, the FSA will, subject to the responses received, consider developing specific options or proposals for discussion in a further consultation paper later this year. The FSA also intends to consult on a number of other technical amendments to the Listing Rules subsequently.
Click here to view the full text of the Consultation Paper.
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