[co-author: Antony Vitanov]
On 3 March 2021, Lord Hill published his recommendations from the UK Listing Review (the "Review"). The Review was launched by the Chancellor in November 2020 to further enhance the UK’s position as an international destination for equity listings. The Review makes 15 recommendations including reducing the free float requirements, allowing dual class share structures on the premium segment of the main market and liberalising the rules regarding special purpose acquisition companies ("SPACs"). At a time when the UK is trying to forge renewed trading relationships the world over, the Review emphasises that the recommendations are not radical proposals aimed at opening up a gap between London and its global centre competitors, but rather closing the gap that has opened up.
This OnPoint focuses on the key recommendations in the seven themes identified by the Review and the next steps to implementation.
Monitoring and delivering results
The Review proposes that the Chancellor should present an annual report to Parliament on the State of the City, setting out the steps that have been taken or are to be taken to promote its attractiveness as a global financial centre, with the first edition potentially being published in early 2022. The report should focus on key performance indicators such as IPOs, volume of capital raised, trading volumes, inward authorisations, while commenting on what has worked and what can be improved.
In the context of the Future Regulatory Framework Review, the FCA’s statutory objectives should be reviewed to provide it with sufficient scope to play its part in building an attractive and competitive environment for companies looking to list. The Review proposes that this could be achieved by charging the FCA with the duty of expressly taking into account the UK’s overall attractiveness as a place to do business, with the FCA being able to tighten or relax regulation to achieve this.
Improving the environment for companies to go public in London
With the intention of encouraging companies to list in London at an earlier stage of their growth cycle and broadening the listed investment landscape, the Review recommends:
- Allowing companies with dual class share structures to list in the premium listing segment while maintaining high corporate governance standards during a transition period, which could include:
- A maximum duration of five years;
- A maximum weighted voting ratio of 20:1;
- Requiring holders of B class shares to be directors;
- Voting being limited to ensuring that the holders are able to continue as directors and to block a change of control of the company while the dual class share structure is in force;
- Limitations on transfer of the B class shares.
The transition period would help founders ensure control is retained and at the end of this period, companies would either become subject to all of the premium listing rules or move segment, while maintaining or expanding the scope of their share structure, subject to a shareholder vote.
- Rebranding and remarketing the standard listing segment, to deal with its acknowledged identity crisis, and promote the venue to companies of all types. Investor groups should be encouraged to develop guidelines on areas that they see as particularly important to allow for companies on the rebooted segment to be index-eligible;
- Reassessing the free float requirements to provide a better measure of liquidity during and post listing;
- Providing more choice for companies by lowering the free-float threshold to 15 percent and allowing other measures of liquidity other than absolute free float percentage;
- Reviewing and updating the definition of shares in public hands so that it considers whether shares are in fact contributing to liquidity by:
- Widening the threshold at which institutional shareholders are excluded from contributing towards the free float calculation from five percent to 10 percent, and further refining the same where holdings are diversified across fund managers within the same investment house but who make independent decisions;
- Extending the definition to include non-inside shareholders (e.g. those without a board seat or those acting in a pure investment capacity) not being treated as in concert with governments;
- Excluding shareholders subject to lock-up agreements.
- Revising the rule requiring the suspension of shares of SPACs on announcement of a potential acquisition to fall in line with rules in the U.S. and parts of Europe and adding shareholder protections. Shareholders could be protected by the right to vote on acquisitions and to redeem shares prior to completion, placing information disclosure requirements for the SPAC upon announcement of a target, while still keeping the suspension presumption for SPACs of certain sizes or of importance to market integrity.
Re-designing the prospectus regime
The Review proposes a fundamental review of the regime to reflect the breadth and maturity of the UK capital markets, and the evolution of the type of business coming to market and those already listed. The following are singled out for consideration:
- Treating admissions to a regulated market and offers to the public separately;
- Amending the prospectus exemption to better represent the type of documentation required for different types of transaction;
- The use of alternative listing documents where appropriate, for example, for further issuances by existing issuers on a regulated market;
- The recognition of prospectuses drawn up under other jurisdictions’ rules, to meet UK requirements.
Such an approach would essentially restore and add to the type of system that was in place prior to the introduction of the EU Prospectus Directive and Regulation.
Tailoring information to meet investors’ needs better
The recommendations on this front are aimed at reducing the challenges faced by companies, which have struggled to meet premium listing requirements, such as those experiencing high growth through significant acquisitions.
The Review proposes:
- Amending the liability regime for issuers and their directors to facilitate the provision of forward-looking information in prospectuses, while establishing certain safeguards, for example, by directors having a defence to liability provided they exercised due care, skill and diligence in compiling the information, along with demonstrating a genuine belief in its truthfulness at the date of publishing;
- Maintaining the three-year track record requirement for the premium listing segment, while reviewing the provisions for scientific research-based companies regarding the revenue earning requirement to broaden their application to a wider range of high growth, innovative companies, across a variety of sectors;
- Amending the requirement for historical financial information covering at least 75 percent of an issuer’s business for premium listings so that this test is only applicable to the most recent financial period within the three-year track record.
Empowering retail investors and improving capital raising for existing listed issuers
The Review suggests that consideration should be given to how technology can be used to improve retail investor involvement in corporate actions and their undertaking of an appropriate stewardship role. The re-establishment of the Rights Issue Review Group is also proposed as a measure to improve the efficiency of further capital raising by listed companies.
Improving the efficiency of the listing process
The Review singles out the recently introduced conduct of business rules in the FCA Handbook relating to the inclusion of unconnected research analysts in an IPO process and suggests that these should be reviewed. The recommendation points out that, in practice, the rules add an extra seven days to the public phase of the process, while not leading to any significant increase in research coverage by unconnected analysts.
Wider financial economic system
Finally, the Review recommends that aspects of the financial ecosystem should be given active consideration, including, unlocking pension investment, maintaining a competitive tax environment and increasing SME research provision and funding.
We expect the recommendations to be broadly welcomed by the market and its constituents; many of whom have been grappling for years with ensuring London remains competitive with other financial centres around the world.
Whilst many of the most widely discussed recommendations (dual-class structures, the changes to the SPAC landscape, the relaxation of the revenue earning track record requirements and the free float) are fundamental and are positive in outlook, in all likelihood of course the fast growing tech and life science issuers London is looking to attract are more focussed on securing the best valuations and the strongest investor and research communities, matters which cannot be improved simply by rule changes.
The recommendations are substantive, far reaching and bold. Lord Hill makes very clear the extent to which reforms are needed. It will be instructive to see how the Government, HM Treasury and the FCA respond and how quickly, and to what extent, the recommendations are put into effect.
The Review notes that responsibility for most of its recommendations lies with the FCA and HM Treasury, with the support of BEIS and consultations with the market featuring in most of its proposals. The FCA has welcomed the Review, with a stated aim of publishing a consultation paper by summer 2021 and seeking to implement new rules by the end of 2021, depending on consultation feedback, board approval and government support.