On 20 December 2023, the UK Financial Conduct Authority (the “FCA”) published a further consultation paper (CP23/31) (the “December Consultation Paper”) for reforming the UK listing regime. The FCA set out detailed proposed reforms including the first tranche of a draft set of Listing Rules (to be renamed the UK Listing Rules), which set out the eligibility requirements that companies would need to comply with when applying for a listing to the London Stock Exchange’s main market (the “Main Market”). The proposals contained in the December Consultation Paper broadly follow the proposed reforms included in the FCA’s prior consultation paper (CP23/10) published in May 2023 (the “May Consultation Paper”) (see our client alert on CP 23/10 here), although the FCA has proposed some changes to them based on the feedback it received. 

The proposals represent another big step toward modernising and simplifying the UK listing regime following Lord Hill’s UK Listing Review published in 2021, which looked at ways to make the UK a more attractive listing venue for companies and for growth companies in particular. Given the wide-ranging nature of the proposed changes (which include transitional arrangements for existing listed companies), we have focused this alert on the key reforms that would apply to a commercial company looking to IPO once the changes are put in place. 

Reforms Relating to a Company’s Eligibility for Listing

Single Listing Category

In line with the FCA’s prior proposals, the current premium and standard listing segments will be replaced by a single category for equity shares of commercial companies (the “Single Listing Category”), with significantly more flexible eligibility requirements than those that currently apply to the premium segment and substantially reduced ongoing obligations. 

The Single Listing Category would mean that prospective issuers would no longer have to choose between a premium listing with higher regulatory requirements and a standard listing, which, whilst providing greater flexibility from a regulatory perspective, has been less well understood and seen as an inferior brand by investors. The more flexible eligibility criteria and less onerous ongoing obligations of the Single Listing Category would also mean that the Main Market could potentially now be more attractive to a wider spectrum of growth companies who previously may have thought their only or most viable listing option in London was the growth market, AIM – thereby giving such companies more options to consider when determining whether to go public in the UK.  

The FCA reconfirmed that for the Single Listing Category it would keep the minimum 10% free float and £30 million market capitalisation requirements it introduced in December 2021. Companies applying for admission to the Single Listing Category would also be required to appoint a sponsor (typically an investment bank that oversees the company’s application and makes certain confirmations to the FCA with regard to the company’s eligibility), as is currently the case for premium listing applications. They will also need to follow the UK Corporate Governance Code’s “comply or explain” regime in relation to how they have applied the code’s principles, which issuers on the standard segment were not previously required to comply with.  

Indexation requirements remain to be confirmed by FTSE Russell for the Single Listing Category (currently, only premium listed companies are eligible for the FTSE’s indices for companies listed on the Main Market, such as the FTSE 100 and FTSE 250).

Financial Eligibility Requirements
As suggested in the May Consultation Paper, the FCA plans to remove the current requirements for a company seeking a premium listing to demonstrate:

• A three-year revenue-generating track record
• Three years of audited historical financial information representing at least 75% of its business
• A “clean” (i.e., unqualified) working capital position for at least 12 months from the date of publication of its admission prospectus

The financial track record requirements have often been cited as a barrier for earlier-stage businesses looking to list on the premium segment in order to fund their growth strategies. By way of comparison, neither AIM nor NASDAQ has a three-year revenue generating track record requirement. This significant change could potentially make the Single Listing Category more attractive to growth companies, which are still at a pre- or early revenue stage or whose growth trajectory is such that their historical financial statements are not fully representative of their current business, which would have previously disregarded the Main Market for this reason. 

The UK prospectus regime has its own historical financial information requirements although these are less prescriptive than those which currently apply to a company seeking a premium listing (for instance, companies must include in their IPO prospectus three years of historical financial information or such shorter period as the company has been in operation). The prospectus regime is also currently under review by the FCA, but the expectation is that these requirements will be retained.

Whilst the requirement for a clean working capital position is expected to be removed, the FCA is proposing to retain the requirement for sponsors to confirm to it at the time of IPO that the directors of the company applying for admission to the Single Listing Category have a reasonable basis for making the working capital statement required to be included in the company’s IPO prospectus in accordance with the prospectus regime (which can be made on a qualified basis). In practice, this will likely mean that the same level of diligence which is currently carried out on a premium listing in relation to a company’s working capital position will continue to be undertaken notwithstanding the removal of the requirement from the UK Listing Rules for a clean confirmation to be made by the company. By way of comparison, a prospective AIM issuer is required to give a “clean” working capital statement and a prospective NASDAQ issuer must disclose whether its capital resources are sufficient to meet its obligations for the next 12 months from the date of its registration statement.

Dual Class Share Structures
Having reviewed the feedback on its proposed changes set out in the May Consultation Paper to the dual class share structure requirements which it implemented in December 2021 for companies seeking a premium listing, the FCA is proposing to make additional changes to the relevant requirements, a number of which differ from what it had originally proposed. 

The proposed revised requirements for a dual class share structure are: 

• Matters where enhanced voting rights will be exercisable – in a change to proposed reforms set out in the May Consultation Paper, the FCA is proposing that enhanced voting rights will not be exercisable on matters requiring a shareholder vote under the UK Listing Rules (e.g. in relation to the approval of employee share schemes and long-term incentive plans, discounted option arrangements and share offers or placings at a discount of more than 10% without a pre-existing shareholder authority). The exemption to this restriction will be votes approving a reverse takeover and, where the company has a controlling shareholder, the election and re-election of independent directors. On a related point, the FCA has also proposed that shareholder votes to approve cancellation of listing at the request of a listed company should be reserved to the shareholders of the listed class of shares. 
• No sunset provisions – in a departure from its previous proposals, the FCA is not proposing to include a specified sunset period on the exercise of any enhanced voting rights (it had previously suggested increasing the current 5 year period to 10 years). The FCA’s view is that having a specified time period could imply that such a timeframe is appropriate in all circumstances rather than allowing it to be negotiated on a case-by-case basis. Once admitted to the Single Listing Category, a company will not be permitted to issue additional enhanced voting shares. At present, enhanced voting rights can only be triggered upon a change of control of the company and therefore act primarily as a deterrent to a takeover rather than as a means of exercising control, so if implemented, these reforms would allow founders of growth companies to retain greater influence over certain strategic decisions put to shareholders (such as the approval of the appointment and re-election of executive directors).
• No specific voting ratio or weighting limits – as previously indicated, the FCA is proposing to remove limits on the maximum enhanced voting ratio (currently 20:1) that can be attached to enhanced voting rights shares. This essentially allows for  companies to have greater flexibility when structuring their share capital at the time of IPO. 
• Holders of enhanced voting rights shares – the FCA has also proposed moving away from the current position that only a director of a company can be a holder of enhanced voting rights shares. Instead, natural persons who are existing investors, shareholders or employees in or of the company at the time of its IPO will, in addition to directors, be able to hold such shares (along with vehicles established for the sole benefit of, or solely owned and controlled by such persons). Growth companies, who are often founder-led and/or have numerous employee shareholders at the time of the IPO, would therefore have greater discretion in relation to who is permitted to hold enhanced voting rights than is currently the case.
• Restrictions on transfer – currently, enhanced voting rights may only be transferred to the beneficiaries of a director’s estate upon such director’s passing. The FCA is proposing to limit transfers further by only allowing enhanced voting rights shares to be transferred to a vehicle established for the sole benefit of, or solely owned and controlled by the initial holder of the shares. This means that the enhanced voting rights would only ever be exercisable by persons known by investors at the time of the company’s IPO when deciding to invest. 

The removal of the limits on voting ratios and the prescribed 5 year sunset period as well as permitting other types of holders of enhanced voting rights shares will provide additional flexibility to the use of dual class share structures and bring the UK closer to practice in the US where such structures are more frequently used and subject only to specific requirements at a State level based on where the relevant company is incorporated. Founders of businesses looking to list on the Single Listing Category would benefit from being able to hold enhanced voting rights without having to be a director of the listing vehicle. 

The proposed new UK requirements would, however, still be more limited in certain respects than in the US where enhanced voting rights can generally be exercised on all shareholder matters. Dual share class structures are not generally permitted on AIM and so would make a Main Market listing potentially more attractive to a founder-backed growth company in this respect.

Independent Business and Control of Business
The current eligibility rules for a premium listing require a company to satisfy the FCA that it carries on an independent business as its main activity and has operational control over such business. Neither AIM nor NASDAQ have similar requirements. The FCA is not proposing for these requirements to be retained for the Single Listing Category so as not to restrict admission to the category to companies with specific business models provided all relevant information with regard to the company is fairly communicated to allow investors to conduct their own assessment and due diligence. 

Controlling Shareholders
The FCA is proposing to retain the current premium listing requirement for a company with a shareholder holding 30% or more voting rights in the issuer (taking into account any parties with whom it is acting in concert) (a “Controlling Shareholder”) to demonstrate that, despite having a Controlling Shareholder, it is able to carry on its main business activity independently from such Controlling Shareholder. The current requirement for companies to enter into a binding relationship agreement with any Controlling Shareholder containing certain prescribed undertakings from the shareholder that are designed to support the company’s ability to comply with the UK Listing Rules on an ongoing basis will therefore be carried across to the Single Listing Category.

The FCA is also proposing to retain the current rules which require the election of independent directors, cancellation of listing and transfer between listing categories to be separately approved by independent shareholders (i.e. excluding a Controlling Shareholder) as well as the full register of members. 

Whilst having a relationship agreement in place with a Controlling Shareholder is not a formal requirement for being admitted to AIM, it is not uncommon for agreements to still be entered into in order to provide comfort to investors who come in at IPO. 

NASDAQ does not have an equivalent controlling shareholder regime or requirement for a relationship agreement to be put in place at the time of IPO.

Separate Listing Category for Companies Seeking a Secondary Listing in the UK
As set out in the May Consultation Paper, the FCA is proposing that a separate listing category be created for companies seeking a secondary listing in the UK. Eligibility and continuing obligations for the secondary listing category would largely replicate those which currently apply to standard listed companies (which are less comprehensive than those which apply to premium listed companies and that are expected to apply to the Single Listing Category). This more flexible route to a secondary listing should help maintain London’s reputation as an attractive listing venue for companies from across the world by allowing overseas companies, who may be required to maintain their local listing, to tap into London’s investor community and have the profile of a UK listing.

Reforms Relating to Continuing Obligations Post IPO

Significant Transactions
In line with its proposals set out in the May Consultation Paper, the FCA continues to move to a more disclosure-based regime for transactions entered into by companies admitted to the Single Listing Category which fall within the current “Class 1” category (transactions meeting the 25% threshold on the class tests set out in the Listing Rules such as a large acquisition or disposal) and to remove specific notification requirements for “Class 2” transactions (transactions between 5% and 25% on the class tests).

As previously proposed, prior shareholder approval and the preparation of an FCA-approved shareholder circular would not be required for transactions falling within the current Class 1 category. Instead, companies would simply be required to make an announcement to the market that the transaction has been entered into. Such announcements would, in addition to satisfying the requirements of the UK Market Abuse Regulation in terms of cleansing any inside information relating to the transaction, need to include certain additional information currently required for the notification of Class 2 transactions as well as certain financial information included in the current Class 1 circular disclosures (but not proforma financial information or a working capital statement).

Listed companies would no longer be required to mandatorily appoint a sponsor on transactions falling within the current Class 1 category but would need to do so if seeking individual guidance from the FCA in relation to the transaction and its requirements under the UK Listing Rules.

If adopted, the FCA’s proposals on significant transactions should meaningfully reduce the impediments and costs associated with deal-making for companies admitted to the Single Listing Category. The FCA notes in particular that based on submissions received, it is more convinced that the contingency created by the requirement to have shareholder approval for large transactions results in UK listed companies paying a premium when participating in competitive M&A and may even preclude UK listed companies from being considered as bidders in the first place (due to the execution risks associated with a shareholder vote).

The proposed changes will also move the Single Listing Category requirements closer to the disclosure-focused approach in the US (i.e. the obligation for NASDAQ-listed companies to publicly disclose material events). If adopted, the rules applicable to AIM quoted companies would be more restrictive than those on the Single Listed Category as AIM quoted companies are currently required to seek prior shareholder approval in respect of any disposal which, when aggregated with any other disposals over the previous 12 month period, would exceed 75% of the class tests.

Related Party Transactions 
In accordance with previous proposals in the May Consultation Paper, the FCA proposes that shareholder approval would no longer be mandatory for a related party transaction (including those with a Controlling Shareholder) but that for transactions over a 5% class test threshold, the board is required to approve the transaction (excluding any conflicted directors) and companies would need to make an announcement with specified disclosures, including a statement by the issuer’s board of directors that the transaction was fair and reasonable as far as shareholders of the company were concerned and that the company had received written confirmation to such effect by a sponsor. The FCA is also proposing to increase the shareholding threshold for when a shareholder is deemed to be a related party of a listed company from 10% to 20% which should also provide additional flexibility in relation to the application of the related party regime (which should be of particular benefit to growth companies whose pre-IPO shareholders often retain large shareholdings after the company’s listing). No mandatory shareholder vote and no notification requirements would apply to related party transactions below the 5% threshold.

As for significant transactions, the above proposals will reduce the ongoing administrative burden and costs related to a listing and simplify the current regime applicable to related party transactions. The proposed changes would also align the Single Listing Category requirements more closely to the current AIM related party notification requirements and the equivalent NASDAQ obligation to publicly disclose material events.

Conclusions

The draft reforms set out in the December Consultation Paper further support the FCA’s proposed intention to move the UK listing regime away from a prescribed rules-based approach designed to protect investors, to a more disclosure-based one in which investors determine for themselves the criteria on which they are prepared to invest and allocate capital. These reforms would align the UK’s regulatory framework more closely with those of other jurisdictions, including the US, which follows a more disclosure-based approach. The FCA recognises that the proposals would constitute a rebalancing of risk between companies coming to market and their investors but are advocating that such a rebalancing is needed in order for the UK market to support the risk appetite the wider economy needs, by encouraging more companies to list on London. From a regulatory and legal perspective, the difference between New York and London in terms of eligibility to list has been significantly minimised. 

Next Steps

The FCA is soliciting feedback on its proposed reforms until 22 March 2024 and intends to publish a final set of UK Listing Rules at the beginning of the second half of 2024 which would come into effect after a short two week implementation period. In short, the UK is moving very quickly to implement these reforms as soon as possible and, hopefully, in time for the next IPO window opening so London is ready to level the playing field with New York. 

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