FCA Primary Markets Effectiveness Review – Immediate changes to the Listing Rules

Hogan Lovells

Hogan Lovells

The UK Financial Conduct Authority (“FCA”) has published Policy Statement PS 21/22 (the “Policy Statement”) which follows up on its summer 2021 consultation paper CP 21/21 “Primary Markets Effectiveness Review” (“CP 21/21”). The Policy Statement sets out the FCA’s proposed changes to its rule books which seek to enhance the attractiveness of the UK’s capital markets.

The Policy Statement makes some important changes to the London Listing Rules (“LR”) – described further below – to permit the premium listing of certain dual-class share structures (“DCSS”), to increase the minimum market capitalisation for both premium and standard listed companies from £700,000 to £30,000,000 and to reduce the free float requirement for premium and standard listed companies from 25% to 10% of shares in public hands.  All of these changes have immediate effect.

The Policy Statement also notes that the FCA will revert in the first half of 2022 both on its broader consideration of the UK listing regime’s purpose and structure and, more specifically, on potential modifications to the three year track record eligibility requirement for premium listed operating companies, both of which were also addressed by CP 21/21. 

Dual class share structure

Operating companies seeking an initial premium listing are now able to adopt a limited DCSS structure to provide founder shareholders with some limited protections.  The FCA has decided to proceed on the basis set out in in CP 21/21, notwithstanding some UK investor resistance.

With immediate effect, new applicants for premium listings will be permitted also to have an unlisted class of shares with weighted voting rights:

  • The voting rights carried by the unlisted shares are limited to a maximum weighted voting ratio of 20:1.
  • The unlisted shares are held only by directors of the company (or, following his or her death, beneficiaries of that director’s estate).
  • The weighted voting rights are only available:
    • on a vote on the removal of the holder as a director at any time; or
    • following a change of control of the company, on any matter (in order to operate as a strong deterrent to a takeover).
  • The weighted voting rights must expire no later than five years after listing.
  • The unlisted shares may vote alongside the company’s listed shares on matters on which the LRs require that otherwise only the listed shares may be voted, provided that all such shares carry one vote per share.  These include approving class 1 and related party transactions; voting on transactions such as rights offers and open offers and approving the cancellation of listing or transfer of listing to the standard segment.

Some points to note on the changes are:

  • The permissible DCSS arrangements are limited in scope and do not, for instance, permit a founder to block a takeover – instead, the weighted voting rights post-takeover serves to discourage takeovers. 
  • In addition, although the DCSS should allow a founder to block his or her removal as a director, they will not permit the director to block the appointment of other directors or, potentially, his or her removal as an employee of the company (which would need to be addressed in the founder’s service agreement). 
  • The maximum 20:1 voting ratio means that a founder will have to own a relatively material proportion of the company’s equity (just over 4.76%) in order to take full advantage of the arrangements by holding a majority of the voting rights on the relevant votes.
  • The ability to implement a DCSS structure is available only to companies that are seeking an initial premium listing – they cannot be implemented by companies with existing premium listings.
  • Companies that wish to adopt more comprehensive DCSS arrangements or “golden shares” can still opt for a standard listing. 
  • Only operating companies – and not investment companies – are permitted to adopt DCSS structures. 

In addition, although a significant reason for seeking a premium listing is to obtain FTSE UK inclusion and, therefore, tracker fund investment, the FCA specifically notes that it is for individual tracker funds (in consultation with their own investors, where applicable) to determine whether they will invest in DCSS companies. 

Increase of minimum market capitalisation requirement

The FCA has increased the minimum market capitalisation for companies seeking a premium or standard listing from £700,000 to £30,000,000, which is lower than the £50,000,000 that the FCA initially proposed.  The reason for the change is to protect the interests of investors, on the basis that issuers with smaller capitalisations are more likely to present concerns. 

Existing listed issuers are not affected by the change.

The FCA is also adopting some transitional measures:

  • Companies which have had a completed submission for eligibility review by 2 December 2021 can apply to list by 2 June 2023 on the basis of a minimum market capitalisation of £700,000.
  • Shell companies, including SPACs, can relist following an acquisition on the basis of a minimum capitalisation of £700,000 provided that they have completed a submission for an eligibility review and prospectus (on the basis of the post-acquisition vehicle) by 1 December 2023 (effectively giving those companies up to two years from now to identify an acquisition and commence the relisting process). 

The minimum market capitalisation change will also apply to depositary receipt listings but not to listed investment companies, which will continue to be subject to the existing £700,000 requirement. 

Reduction of free float requirement

The free float requirements for shares in public hands for premium and standard listed companies is reduced from 25% to 10% of the relevant class of shares, both on an initial and continuing basis. The FCA has said that it will not grant concessions below 10%. 

The existing definition of shares in public hands (e.g. discounting holders of 5% or more of the relevant class of shares) remains unchanged. 

It is worth noting that the basic free float requirement for admission of UK companies to the FTSE UK Indices (which is set in the FTSE Ground Rules, not the LRs) remains at 25%. 

[View source.]

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