As part of its ongoing review, the London Stock Exchange has published a consultation document setting out a number of proposed rule changes.

Proposed amendments to the Listing Rules

As part of its ongoing review of the Listing Rules, the London Stock Exchange has published a consultation document setting out a number of proposed rule changes in order to remove the regulatory burden on listed companies wherever possible, to remove duplication or inconsistencies, to eliminate outdated rules and to clarify rules to ensure that they are readily understood by all users

"... an approved sponsor has a responsibility to the Stock Exchange to ensure the issuer is properly guided and advised..."

A summary of the main proposed rule changes is as follows:

Sponsors
When sponsors are required

The Listing Rules currently set out various specific circumstances when a company is required to retain a sponsor. The Stock Exchange wants to ensure that, where sponsors are retained on a continuing basis, they continue to act with the appropriate care and skill expected of an approved sponsor.

The Stock Exchange does not want an adviser to be able to argue that, since there is no general requirement for a sponsor to be appointed under the Listing Rules, it owes none of the usual sponsors' responsibilities to the Stock Exchange when it is giving advice regarding the application of the Listing Rules.

As a result, it is proposed to add a new rule to provide that where an entity, which is an approved sponsor, is appointed or utilised by an issuer, other than in the specific circumstances set out in the Listing Rules, that entity has a responsibility, owed solely to the Stock Exchange, to ensure that the issuer is properly guided and advised as to the application of the Listing Rules and must discharge that responsibility with due care and skill.

Additional responsibilities of a sponsor

The Stock Exchange has decided against spelling out in more detail the individual steps and duties a sponsor should observe in discharging its overall responsibilities. However, an amendment is proposed to make it clear that a sponsor must be satisfied that an issuer which is a new applicant is an appropriate entity to be admitted to listing.

Conditions for Listing
Continuity of management

It is proposed to change the current "continuity of management" test, which ensures a new applicant is required to have continuity of management throughout the period covered by its financial record in its prospectus. In summary, the directors or senior managers of the company, taken together, must include persons who have had appropriate involvement in, and responsibility for, the management of the company's business throughout the three year period.

Controlling shareholder

It is proposed to amend the rules on the independence of decision-making between a board of directors of a company and a major shareholder (holding of 30% or more) to focus on ensuring the independence of the business of the company from the other interests of the controlling shareholder by means of a relationship agreement or agreements.

Market makers

The Stock Exchange believes the requirement for a company to have at least two market makers in respect of securities which are not already listed is no longer necessary if securities are traded on SEATS.

Publication and circulation of listing particulars

Since the introduction of the Public Offers of Securities Regulations 1995 (the "Pos Regs"), the Listing Rules have required all documents that announce a public offer of securities to be lodged with the Stock Exchange in draft form and be authorised (without approval of its contents) under section 154 of the Financial Services Act 1986. There have been practical problems in applying the rule and the Stock Exchange believes it desirable to revert to the position prior to implementation of the Pos Regs. As a result, although such advertisements will have to be lodged with the Stock Exchange prior to publication, the requirement for authorisation under section 154 will be removed.

Disapplication of pre-emption rights

The Companies Act 1985 allows a company to disapply the statutory pre-emption rights for up to five years. The Stock Exchange is now proposing to conform its provisions with Companies Act 1985. A listed company will accordingly be able to disapply the statutory pre-emption rights for up to 5 years, instead of the current maximum of 15 months.

The ABI pre-emption guidelines (the "Guidelines") currently require listed companies to obtain shareholder approval for the disapplication of statutory pre-emption rights on an annual basis. It remains to be seen whether the ABI will amend Guidelines to allow for a disapplication of up to 5 years.

The Guidelines currently state that the ABI will advise its members to approve resolutions to disapply pre-emption rights, provided such disapplications are limited to shares not exceeding 5% of the issued ordinary share capital of the company concerned. It is expected that many listed companies will continue to seek authority for their directors to allot shares and to disapply statutory pre-emption rights on an annual basis so as to benefit from any increases in the amount of the issued share capital which have taken place since the last annual general meeting.

Transactions

At present, where a listed company has published an unaudited interim balance sheet since its last audited balance sheet, it may use the net assets included in the interim balance sheet for transaction classification purposes.

The Stock Exchange proposes to make it mandatory to use the net assets included in an interim balance sheet for classification purposes, when one has been published since the last audited balance sheet.

Transactions with related parties

It is proposed that any arrangement where a listed company (or its subsidiary undertakings) and one of its directors or substantial shareholders (i.e. a related party) each invest in another undertaking or asset, should be classified as a transaction with a related party, unless the terms and circumstances of the investment by the company are not, in the opinion of an appropriate financial adviser, disadvantageous to the company.

Financial information
Profit forecast and estimate

To help investors to understand profit forecasts and to be consistent with, inter alia, the City Code on Takeovers and Mergers, the Stock Exchange is lifting its long standing objection to the disclosure of significant risk factors and sensitivities of profit forecasts.

Pro forma profit statements

At present, the Listing Rules permit the presentation of a pro forma statement of net assets, but the inclusion of pro forma profit statements is currently prohibited except in certain limited circumstances. This situation presents a conflict between the Listing Rules and those of other authorities, particularly the SEC, whose approach is that , if pro-forma information is material in relation to a transaction, it must be disclosed. The Stock Exchange believes that it should have no objection to the principle of disclosure of pro-forma financial statements and, indeed, should support such disclosures in the interests of providing investors with helpful information. It is therefore proposed to permit much greater flexibility in this area in future, but as a safeguard for investors and to ensure consistent treatment of all types of pro-forma financial information, it is proposed that the information should be reported on by accountants.

Purchase of own shares

The Stock Exchange is attempting to remove unnecessary restrictions on the freedom of listed companies to purchase their own listed securities. To achieve this, the Stock Exchange proposes to amend the Listing Rules:

• so that the related party transaction rules do not apply to an offer to all holders of the class of securities on the same terms or to a market purchase pursuant to a general authority granted by shareholders, made without prior understanding, arrangement or agreement;
• by removing the restrictions on the maximum price that may be paid in the context of offers that are available to all holders of the class of securities on the same terms.

"...the Stock Exchange is lifting its long standing objection to the disclosure of...risk factors of profit forecasts."

Directors

Directors' dealing notification

The Stock Exchange proposes to reduce the maximum period allowed for a director to notify any company of which he is a director of a dealing in that company's securities with a value of £20,000 or more from five days to two days.

Model Code

The Stock Exchange proposes to add a new paragraph in the Model Code to require a director dealing in a significant amount of shares (i.e. an amount which may not be immediately marketable) to inform the intermediary that he/she is a director of the company concerned and to authorise the intermediary to disclose that fact to potential counterparties.

Scientific research based companies

Certain amendments are proposed to the "lock-up" provisions applicable to flotations of scientific research based companies under the provisions of Chapter 20 of the Listing Rules. In particular the following amendments/classifications are proposed:-

• the lock-up undertakings will be required from the directors and former directors of the principal trading subsidiary. This is because the entity seeking the listing is often a newly incorporated holding company;
• when calculating whether someone is a major shareholder of 3% or more, and so is obliged to give a lock-up undertaking, holdings will be calculated on a fully diluted basis assuming exercise of all existing warrants and options but no account will be taken of any shares issued to raise new money;
• shares subscribed for at the time of or following admission by existing major shareholders holding 3% or more will not be subject to a lock up undertaking; and
• new shareholders holding 3% or more (i.e. those subscribing for, or obtaining more than 3% on flotation) will not be locked up.

In addition, the Stock Exchange is also canvassing views on whether the Listing Rules should continue to contain lock-up provisions and, if not, what alternative provisions (if any) should be introduced given that the lock-up provisions only operate in circumstances where the Listing Rules grant a concession from the normal three year trading and management record requirements.