On 20 December 2023, the FCA published finalised proposals for the merger of the existing premium and standard equity listing segments into a new single equity segment. A detailed discussion of these proposals, feedback received on its May 2023 (CP 23/10) “in principle” consultation of the proposed listing regime changes, details of the other listing segments changes it is proposing to make, revisions to the listing rules’ sponsor competencies requirements, and a first tranche of draft new listing rules covering just the new equity segment, are all set out in Consultation Paper 23/31 (CP23/31). See our briefing on the FCA’s May 2023 consultation here.

The FCA is asking for feedback on the sponsor competencies revisions by 16 February 2024 since these changes are intended to come into force this Spring, in advance of the new listing rules which will be finalized and published in H2, 2024. Comments on the rest of the proposals (including the first tranche of the draft listing rules) are called for by 22 March 2024, with a view to a complete set of listing rules being published in final form in H2, 2024. A second tranche of draft listing rules covering all the other listing segments – some new and some intended to be carried over from the existing listing regime – will be published for comments in Q1, 2024.

Headline points

The FCA is proceeding with most of what it proposed in CP 23/10 for the new equity listing segment but, as a result of the feedback it has received, is making a few important changes to some of the detail of its proposals. It has also provided details of how the other listing segments will work as part of the new UK listing regime.

Key changes from the existing premium listing regime for the new “commercial company” equity listing, as confirmed by CP 23/31

• Listing eligibility:
  • No three year historical financial information/revenue track record/clean working capital requirements (but NB prospectus disclosure requirements)
  • Control/independence of business requirements – limited to issuers with controlling shareholders (i.e., with a 30% votes holding)
• Sponsor appointment: required in a reduced number of scenarios
• Significant transactions (Class 1): no shareholder vote/circular/formal sponsor involvement (except for reverse takeovers)
• Related Party Transactions (RPTs): no shareholder vote/circular but sponsor role retained
• Dual Class Share Structures (DCSS): most restrictions removed
• Financial distress-reconstruction/refinancing: no working capital statement required/no FCA review of circulars/no sponsor involvement
• Share buybacks: no FCA approval of circular/no working capital statement/no sponsor involvement.

Key changes in CP 23/31 from the FCA’s proposals in CP 23/10

• Controlling shareholder (or “relationship”) agreements will be retained
• Sunset clause and some other restrictions on DCSS dropped
• Enhanced notifications for “Class 1” transactions (to be renamed as simply “significant transactions”).

Existing v Proposed Listing Regime

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The new commercial company equity segment

This new equity listing segment – called in the draft Listing Rules “equity shares (commercial companies)” (ESCCs) – will replace the existing premium equity (commercial companies) and standard (shares) segments. It will represent something of a compromise between the investor protections currently provided by a premium listing and the flexibility offered by a standard listing. Key features of the new segment – most of which were proposed in CP 23/10 are as follows.

Reduced listing eligibility requirements

Existing three-year financial history, revenue track record and clean working capital requirements will be dropped as listing requirements though these will still likely feature in IPO prospectuses as required by Prospectus Regulation (or the forthcoming new FCA prospectus rules) requirements. So too will the current independence and control of business listing requirements, except, however, in the case of ESCCs with a controlling shareholder for which they will be retained (see below).

The current eligibility requirements in relation to issuers with a DCSS will also be significantly relaxed (see below)

Other important eligibility requirements will, however, be retained, such as pre-emption rights, the 10% public float, minimum £30 million market capitalization and those applying to externally managed companies.

The FCA is not proposing to provide a definition of “commercial company” for this new segment but will expect companies for which there is another appropriate listing segment – e.g., a shell company or CEIF – to satisfy the requirements for entry into that segment to be listed.

Reduced role for sponsors

Retained roles: The role of sponsors on listing applications (and certain transfers between segments) will remain largely unchanged, with sponsor due diligence and declarations still required – though things like financial track record information and working capital will become a focus of the sponsor in relation to prospectus disclosures. Also, ESCCs will still need to have their sponsor confirm to them (for disclosure in the relevant notification to the market) that the terms of a RPT are “fair and reasonable”.

Roles that will be dropped: There will no longer be any need for the formal appointment of a sponsor to provide guidance in relation to significant transactions undertaken by ESCCs (or in relation to circulars in connection with financial reconstructions or share buybacks). However, a sponsor will still need to be appointed if individual guidance or a waiver or modification of the significant transaction rules from the FCA is required.

Controlling shareholder regime

Following the critical feedback it received on a much more relaxed “controlling shareholder” regime for the ESCC segment, the FCA is proposing largely to retain the existing premium listing regime with, for example, its requirements for a relationship agreement between the shareholder and issuer and separate voting by “independent shareholders” on the election of independent directors and on cancellations or transfers out, of the ESCC segment.

DCSS

In CP 23/10 the FCA proposed retaining just two key conditions for issuers with founders holding DCSS shares (i.e., shares with super voting rights) to be listed. These were a (10 years) sunset clause on when the votes attaching to DCSS shares would expire and a requirement that the DCSS shares are held by directors of the issuer. It is now dropping the sunset clause condition – though says that in practice it expects to see issuers negotiating some form of time limit on DCSS shares at the time of their IPO. No further issue of DCSS shares will be allowed after listing.

It is also proposing a rather wider range of persons who can hold DCSS shares – not just directors but also natural persons who are investors in the issuer, employees and persons holding the shares (or even just the voting rights attached to the shares) for one of these permitted holders.

CP 23/31 sets out a list of shareholder matters on which DCSS shares would or would not be permitted to vote. The principle will be that DCSS shares can be voted on “most strategic matters affecting the future of the issuer” (e.g., reverse takeovers (RTs)) but not on certain transactions that “have the potential to be economically damaging to ordinary/minority shareholders” (e.g., employee share schemes). Thus, where the ESCC segment will require a shareholder vote, this will in most cases be restricted to the votes of the issuer’s listed shares (and therefore will exclude any voting of DCSS shares).

Significant transactions (excl. RTs)

The big changes here are the dropping of the current premium listing requirements for sponsor appointment and advice, a FCA-approved shareholder circular and a shareholder vote. Plus the removal of the current notification only requirements for transactions (Class 2) falling below the “Class 1” 25% thresholds but not below 5% (though issuers will, of course, need to consider making prompt disclosure of the transaction as required by MAR). In addition, the current “profits test” as a trigger for class 1 transactions – to be renamed as simply “significant transactions” - will be dropped.

CP 23/31 summarises the detailed discussions the FCA has had over these controversial proposals with both buy side and sell side market participants plus other interested parties. Not surprisingly, the buy side has been very largely opposed to these big relaxations. As a counter proposal, some buy side participants instead proposed significant increases in the Class 1 threshold triggers.

At the end of the day the FCA has chosen to stick with its new disclosure-based approach but is also strengthening that with increased mandatory disclosures that ESCC issuers will be required to make for transactions triggering the 25% threshold tests. These disclosures will include an enhanced form of the basic disclosure currently required for Class 2 transactions, including some of the financial information currently required for Class 1 circulars (e.g., historical financial information on the target) and a statement that the issuer’s board considers the transaction to be in the best interests of its security holders as a whole. An annex to the draft ESCC listing rules sets out the detailed disclosure items which are considerably more extensive than those currently applying to Class 2 transactions. Issuers will also be required to disclose any additional information necessary to provide an understanding of, or to enable shareholders to assess, the terms of the transaction and its impact on the issuer.

The FCA is also proposing new or clarificatory guidance or rule changes in relation to the operation of the “ordinary course of business” exception and the aggregation of transactions provisions, in respect of both the “significant transaction” and the RPT listing rules.

RTs

In contrast to the premium listing rules governing significant transactions generally, those rules that currently apply to RTs will be largely carried over into the ESCC segment. Thus, notifications to the market of the transaction, the appointment of a sponsor, a shareholder circular (with prescribed content) and approval and a presumption - unless the target is already an ESCC-listed issuer - of the cancellation of the issuer's listing and, if the enlarged group is to be listed, a re-admission application and prospectus, will continue to apply.

RPTs

The FCA seems to have received less pushback on its ESCC proposals to drop the current premium listing requirements for a FCA-approved circular and a shareholder vote for RPTs that trigger the 5% thresholds. Going forward, for 5%/+ RPTs, ESCC issuers will effectively have to comply with requirements that will apply in place of (but be very similar to) the current Shareholder Rights Directive-derived requirements set out in DTR 7.3 – i.e., obtain board approval and make a prescribed market notification of the transaction. This notification will have to include a statement that the board considers it to be fair and reasonable as regards its security holders and has been so advised by its sponsor.

There will be no specific listing rule notification requirements and no sponsor “fair and reasonable” opinion will be required, in respect of RPTs falling below the 5% threshold. Finally, the FCA is also proposing doubling the threshold at which a substantial shareholder becomes a related party – from 10% to 20%.

Shareholder votes and circulars still required

Although shareholder votes and circulars will be dropped for significant transactions and RPTs, they will be retained – generally in line with existing premium listing requirements – for RTs, pre-emption disapplication, 10%+ discounts in offers/placings, share buybacks (i.e., >15% and not by way of tender offer) and employee share schemes, etc.

The presumption that on a RT (and except where the target is in the same listing segment as the issuer), the issuer’s listing will be cancelled will also be carried over to the ESCC segment. Also, while share buyback circulars will have prescribed content similar to existing premium listing requirements, a working capital statement will no longer be required (where the issuer is seeking authority to purchase 25%/+ of its issued equity) and neither will FCA approval or the appointment of a sponsor.

Corporate governance and reporting; Listing Principles

The existing premium listing requirements as regards corporate governance code disclosures and climate change and diversity reporting will be carried over to the ESCC segment. As regards corporate governance disclosures, issuers will therefore be required to to “comply or explain” against the UK Corporate Governance Code though the FCA indicates in CP 23/31 that an issuer might explain against the UK code by reference to an alternative governance code that it currently feels is better suited to it. Such alternative codes should either be required by law or regulation for the issuer or be widely adopted as a credible standard in market practice. The example is given of a newly admitted issuer that plans fully to comply with the UK code in due course.

There will, of course, no longer be any separate premium listing principles but just a single set of principles. However, the FCA is proposing that existing premium principle 3 (equal voting rights for a class of listed equity shares) and 4 (aggregate voting rights in each class of listed equity to reflect the relative equity interests of the classes) should be applied as specific requirements in the ESCC and CEIF segments rather than operating as general listing principles. Draft rules to do this will follow in the second tranche of draft listing rules already mentioned.

SCCs and CEIFs

The existing (and still empty of applicants) SCC premium listing segment will be merged into the ESCC segment but with modifications to reflect its current special listing rule dispensations (e.g., no controlling shareholder agreements and no sponsor involvement in RPTs).

The existing CEIF premium listing category will become a new listing segment with listing requirements that will remain broadly similar to the existing requirements for CEIFs.

The Transition segment (equity)

For existing issuers with a standard listing of equity shares, the FCA is proposing that they be moved into a new “transition” listing segment that would have the same continuing obligation requirements as their standard listing does. This segment would be closed to new entrants (including transfers) and would not have an end date as a category of listing (though if the segment ends up with very few issuers it may be phased out). Issuers will be able to decide if and when they want to transfer to an appropriate listing segment and the FCA is promising to introduce a modified transfer process to encourage issuers to consider moving to the ESCC segment. Issuers who undertake a RT will be required to reapply for listing in the ESCC segment (to retain a UK listing). CEIF/OEIC issuers will be required to transfer to appropriate retained new listing segment (see the table above). There will be no sponsor role in respect of continuing obligations but a sponsor will be required for transfers to the ESCC, CEIF or Shell companies segments.

The International secondary segment (equity)

This new listing segment will be available for existing and future non-UK equity issuers with a primary listing outside of the UK which may face difficulties complying with all the ESCC listing requirements. Eligibility requirements will be similar to those currently applying to standard equity listings with some additional (and continuing) requirements designed to restrict its use to genuine secondary listings. Again, there will be no sponsor role in this segment.

Non-voting/non-equity shares segment

This segment, open to new entrants, will cover issuers with, for example, retail preference shares and other non-voting equity shares. Existing standard listing rules will apply to it and there will be no sponsor requirement.

Shell companies segment

This category will include SPACs and have the sponsor regime apply to it. The “big SPAC” reforms that were introduced in August 2021 to avoid a SPAC’s listing being suspended on its deSPAC if it has adopted prescribed investor protections (e.g., shareholder approval and redemption rights), will be carried forward into this segment. New rules will require, in respect of the first transaction carried out by a shell company – broadly defined so as to include, for example, purchasing a minority stake or entering into a JV – a shareholder circular and approval and the appointment of a sponsor, etc. On closing the transaction, the issuer will be required to apply for admission to an appropriate new listing segment.

Retained existing listing segments

The other listing segments available under the new listing regime will comprise, largely unchanged in terms of listing requirements, the existing standard listing categories – such as debt, DRs and warrants, etc.

Revised sponsor competency requirements

Finally, CP 23/31 sets out proposed changes to the existing listing rules’ “sponsor competence” requirements. Those rules require FCA-approved sponsors to satisfy the FCA as to their competence to provide sponsor services, both when applying for approval and as an on-going obligation. Among other things, this requires the submission to the FCA of a sponsor declaration within the previous three years. With low or fluctuating levels of market activity, this requirement can become difficult to satisfy.

The FCA is therefore proposing to revise the sponsor competence rules to address this difficulty by extending the previous three years requirement to one of five years and by allowing a sponsor to demonstrate its competence by reference to experience gained from providing certain other corporate finance advisory services to issuers admitted to trading on a UK recognized investment exchange with market capitalisation of at least £30 million.

As mentioned above, these changes are intended to take effect, subject to feedback received by 16 February 2024, later in Q1, 2024 and so in advance of the new listing regime being finalised.

Next steps

We will have to wait to see the second tranche of the new draft listing regime rules published in Q1, 2024 before we can have a complete picture of the new regime and its detailed requirements. Watch out for our updated commentary on the UK’s new listing regime when that second tranche of rules is published and when a complete set of finalised listing rules is available in H2, 2024.

"we [are] committed to seizing the opportunity to further strengthen the attractiveness of UK capital markets. This consultation on the detailed rules is the next milestone as we deliver on that promise at pace, .... we will continue to engage and seek feedback from all sides of the debate on reform to ensure we have got the balance right. The markets of today have evolved and the challenges of tomorrow are ever pressing. Now is the time to turn these challenges into opportunities." Foreward to CP 23/31

https://www.fca.org.uk/publication/consultation/cp23-31.pdf