This publication is one of several Allen & Overy publications on the FCA’s Consultation Paper (CP23/31), setting out its detailed proposals for listing rules reforms as part of its Primary Markets Effectiveness Review. Our other publications can be found here.

In this publication, we consider the proposed significant and related party transactions and reverse takeover requirements for issuers on the new commercial companies category.

There will be people on both sides of the debate that believe the changes have either gone too far or not far enough. These proposals are, however, a significant step forward.

The changes place even greater emphasis on shareholder engagement and stewardship, and the centricity, responsibility and accountability of the board is now even more in focus. As engagement on the new UK Listing Rules continues, attention shifts to the UK’s corporate governance (see our recent publication on the updated corporate governance code) and stewardship codes and the important task of resetting the relationship between boards and investors.

Significant transactions

The FCA has confirmed its intention to introduce a disclosure-based regime for significant transactions, addressing industry feedback that the current significant transactions regime negatively impacts UK listed issuers, particularly in their ability to competitively bid in mergers and acquisitions. The FCA intends to amend the regime by:

• removing the requirement for issuers to seek prior shareholder approval in connection with class 1 transactions (although shareholder approval will still be required for a reverse takeover – see Reverse takeovers below);
• removing the associated obligation to produce an FCA-approved shareholder circular;
• amending the class tests by removing the ‘profits test’ currently used to classify transactions;
• reducing the regulatory burden by removing the requirement for issuers to seek sponsor guidance when a significant transaction is contemplated or to obtain a sponsor declaration in respect of a significant transaction; however, a sponsor will be required if any guidance on the significant transaction rules or any modification or waiver of the significant transaction rules is sought from the FCA, or in the case of a reverse takeover (see Reverse takeovers below); and
• removing the class 2 notification requirement for transactions between 5% and 25% on the class tests.

The FCA is proposing an enhanced market notification regime for transactions at the ≥25% threshold to ensure issuer transparency on the key information informing their assessment of a deal. The FCA believes this will “incentivise boards to make robust assessments and give shareholders (and the broader market) information to inform their ongoing investment decisions and engagement with a company’s management.” The new regime supports good stewardship by ensuring sufficient disclosure from which investors may subsequently engage with and/or measure the performance of the issuer.

The proposed enhanced disclosures regime includes, where available, at least two years of historical financial information on the target, which information is not required to be restated or audited. There is no requirement for a working capital statement or requirement to confirm or reject an existing profit forecast or profit estimate, and any pro forma financial information that is included in the notification is not required to be prepared to prospectus standards.

These proposals mean that financial information published in connection with notifications will not be required to be subject to mandatory third-party scrutiny; the role of advisers in the preparation of such financial information would be at the discretion of the issuer.

The detailed disclosure obligations will include risk factors and other confirmations currently required for a class 1 circular (e.g. summaries of legal and arbitration proceedings, significant changes in financial position and material contracts) and would be supported by an overarching obligation on the issuer to include any other relevant circumstances or information necessary to provide an understanding of, or enable the shareholders to assess, the terms of the transaction and its impact on the issuer.

There is therefore a significant lessening of the information (in particular, financial information) that is required to be disclosed and more flexibility in the manner in which any such information is disclosed. Issuers are still required to make sure that investors have sufficient information and such information still needs to be prepared to the general standards of accuracy and completeness.

In a bid to ensure clarity and proportionality, the FCA is also proposing new guidance on whether a transaction is to be assessed as within or outside of the issuer’s ordinary course of business – by clarifying that, for example, transactions that are undertaken to support the existing business may be ordinary course even if not regularly undertaken as part of day-to-day business activities. The FCA is also proposing amendments to the existing ‘aggregation’ requirements as a consequence of the proposal to remove the shareholder vote in favour of a new notification regime, and in order to support transparency but in a proportionate manner with clear rules.

Reconstructions and refinancings

Under the current Listing Rules, a circular published by a premium-listed commercial company relating to shareholder approval for a reconstruction or refinancing must include a working capital statement. To ensure consistency with the proposed significant transactions regime (where a working capital statement will no longer be required), the FCA is proposing to remove the requirement to include a working capital statement in any circular relating to a reconstruction or refinancing. Where a significant transaction is undertaken by a company facing financial difficulty, enhanced disclosures will apply “to support transparency and shareholder engagement”. These disclosures include a statement by the board and explanations of why the company has entered into the transaction because it is in severe financial difficulty or to address the risk of a current or reasonably projected working capital shortfall. Details of the group's prospects for at least the current financial year and explanations of why the transaction addresses the financial difficulty and the consequences of not proceeding with the transaction will also be provided.

Reverse takeovers

A reverse takeover is a transaction where the issuer acquires a business of the same size or larger based on the class tests, or that results in a fundamental change in its business or in a change in board or voting control of the issuer. The FCA intends to retain the existing regime applicable to reverse takeovers, given their significance. Therefore, the FCA is proposing that issuers would need to:

• make a notification as soon as possible after the terms of the reverse takeover are agreed, including some of the information required for a significant transaction notification;
• send an FCA-approved explanatory circular to its shareholders, which largely reflects the content required for notifications of significant transactions, subject to relevant sponsor declarations prior to circulation; and
• include the information required for notifications of related party transactions in the notification and circular where the reverse takeover is also a related party transaction.

The FCA also aims to carry over the presumption of cancelling the listing of a commercial company’s shares when it completes a reverse takeover, meaning that the commercial company will need to apply for admission to list the enlarged group. The existing premium listing sponsor roles on a reverse takeover by a commercial company and re-admission to listing are expected to remain substantially unchanged, including the requirement for the issuer to obtain the guidance of a sponsor in connection with the reverse takeover.