FCA overhauls the UK listing regime as part of the most ambitious listing rule reform in recent years

On 11 July 2024, the Financial Conduct Authority (FCA) published its final policy position and rules for a revised UK listing regime to modernise the existing Listing Rules.

These changes follow extensive market engagement and feedback over the last couple of years, including consultations in May 2023 and December 2023. In its final policy position, the FCA has gone further than expected (and in the face of significant dissent from certain quarters of the market), such as by the inclusion of rules allowing sovereign and other institutional investors to hold enhanced voting rights under dual class share structures.

The new rules represent a substantial and welcome overhaul of the listing regime. The FCA’s  aim is to  make UK equity capital markets more competitive internationally and reflect the need for greater flexibility and for an approach to risk which is principally disclosure, rather than regulation, based.

With these reforms, the FCA seeks to draw issuers, and in particular innovative companies, back to the UK after a series of high profile moves elsewhere of primary listings, de-listings and falling numbers of IPOs, while at the same time maintaining market integrity and consumer protection.

Key changes

As widely anticipated, the principal change is the creation of a simplified single listing category for equity shares in commercial companies (ESCC), which will replace the current premium and standard listings.

A streamlined set of rules will apply to this new merged category, which broadly represent a more relaxed regulatory approach for current premium list companies. However, current standard list companies will become subject to some enhanced or new obligations or restrictions, such as the requirements in relation to significant transactions.  For this reason, these companies will have the option to remain in a new closed “transition category”, which maintains the status quo based on current standard list rules, rather than joining the new single ESCC category.

The new rulebook also includes the rules applicable to the listing categories for other types of instruments and issuers, such as investment companies, international secondary listings, shell companies, and depositary receipts.

The key changes for companies in the ESCC category include:

• Eligibility - historical financial information, a three-year revenue track record and ‘clean’ working capital statements are no longer required as a condition for listing.
• Sponsors - all new applicants for listing will now need a sponsor, although that role will be more limited when compared to the current sponsor role for premium listed companies. 
• Independence – the requirement for issuers to be independent from controlling shareholders is retained, but with amended guidance on non-independence. In a less expected development, relationship agreements with controlling shareholders, previously a requirement for premium listed companies, are no longer required. In their stead, the new rules rely on market disclosure and the ‘comply or explain’ regime under the UK Corporate Governance Code in relation to independent directors and board committees.  Whilst a relationship agreement will not be required, directors will be able to express their views on a resolution proposed by a controlling shareholder - if they consider that it is intended to circumvent the new rules.
• Dual class shares structures and enhanced voting rights – these requirements are being relaxed and broadened for current premium list companies. In addition to directors, shareholders such as company founders will be able to hold enhanced voting rights, as will pre-IPO institutional investors, such as venture capital and private equity funds, for a period of ten years from IPO.
• Significant transactions - the new rules remove the general requirement for shareholder approval for significant transactions, which are transactions that exceed 25% in any of the class tests (which have themselves been amended to remove the ‘profits test’). This has been implemented to address concerns over the time, uncertainty and expense (and related disadvantages in, for example, a competitive auction process) involved in obtaining such approvals. Instead, these transactions will be subject to market disclosure, with new rules as to when this disclosure must be made.  An initial announcement must be made when a transaction is entered into with further information, similar to that which was required to be included in a class 1 circular, being announced no later than when the transaction closes.  Prior shareholder approval will still be required in relation to reverse takeovers.
• Related party transactions - compulsory shareholder votes and circulars  for large related party transactions will also no longer be required, replaced again with a disclosure based approach, including a requirement for a sponsor’s fair and reasonable opinion.

The rules applying to investment companies (previously in Chapter 15 of the Listing Rules) are largely unchanged, other than not requiring shareholder approval for significant transactions.

Implementation

The new rules will become immediately effective on 29 July 2024, with the FCA due to review the effectiveness of the new listing regime after five years.  Changes to the Official List will start to appear from 26 July 2024.

Existing premium list companies will automatically transfer to the ESCC category on 29 July, whilst  current standard list companies will transfer to the transition category. These companies will be able to apply to transfer to the ESCC category under a modified transfer process.

Certain transitional arrangements apply to “in flight” applications (i.e. where a complete submission for eligibility review has been submitted to the FCA but the securities have not yet been admitted) and to ongoing listing rule transactions. These include the following:

• Any listing rule transactions that are ongoing but not complete by 29 July 2024 (for example, current ‘class 1’ transactions) will not need to comply with requirements or obligations that will cease to apply from such date.
• In-flight applications to standard listing that correspond to either the transition category, the shell companies’ category or the secondary listings category, will have a period of one year from 29 July 2024 to complete the admission process.
• Incomplete or new submissions for admission after 29 July 2024 will need to be submitted under the new rules.
• All existing issuers and in-flight applicants will have six months to put in place appropriate systems and controls for the new rules.

This article was first published by Reuters Regulatory Intelligence.