London Stock Exchange introduces new market segment for high growth companies

Summary

High-growth companies now have a new route to market in the UK following the introduction on 27 March 2013 of a dedicated segment of the UKLA’s Main Market. The new “high growth segment” is designed for EEA-incorporated issuers valued at £300-600 million with revenue growth of at least 20% over the previous three financial years. An applicant must raise more than £15 million on admission, and at least 10% of its shares must be in public hands on admission and from then on. The new segment sits alongside the existing premium and standard segments of the Main Market (Official List), and AIM, and is meant to be used as a stepping stone towards a future premium listing. The London Stock Exchange hopes that the new segment will attract companies – especially tech businesses - that may otherwise have gone to NASDAQ.

As a segment of the Main Market, the high growth segment is an EEA regulated market, and issuers are therefore subject to investor protection rules imposed by various European Directives, including the Prospectus, Market Abuse and Transparency Directives. This means that:

• on admission an issuer must produce a prospectus approved by the FCA (previously known as the FSA) or its national regulator that contains certain specified information, including audited historical financial information and a statement that the issuer will have sufficient working capital for the next 12 months;
• the issuer must announce all price-sensitive information as soon as possible, except in certain narrow circumstances;
• the issuer must publish annual and half-yearly financial information, and an interim management statement, in accordance with the same framework and timescales as a premium listed issuer;
• major shareholders must notify the issuer, and in turn the issuer must notify the market, when their holding goes through a whole percentage point (for UK issuers, this broadly means at 3% and above); and
• directors must notify the issuer, and in turn the issuer must notify the market, when they deal in the issuer’s shares.

In addition, a high growth segment issuer must:

• Appoint a Key Adviser for admission, whenever it undertakes a major or related party transaction or a reverse takeover, and in certain other circumstances (see further below). Premium listed issuers must appoint a sponsor in similar circumstances, whereas AIM companies must retain a nominated adviser at all times.
• Make an announcement containing certain prescribed information if it proposes to enter into a major or related party transaction; but shareholder approval is not required unless it is a reverse takeover. (See below for further details.) Similar rules apply to AIM companies.
• Announce certain events such as a board change or change in the issuer’s capital structure. Premium listed and AIM companies are subject to similar rules.
• Comply or explain against its national corporate governance code or another chosen code. AIM companies are not required to report against any particular code (although many choose to report against the QCA’s Corporate Governance Guidelines for AIM Companies); whereas premium listed issuers, wherever incorporated, must report against the UK Corporate Governance Code.
• Publish continuously certain key documents on its website, including copies of its constitutional documents, most recent financial information and all RIS announcements made during the previous 12 months. AIM companies are likewise required to publish such information continuously. Premium listed issuers are not required to publish such information on their websites, but many do so as a matter of best practice.

However, high growth segment issuers do not have to comply with the FCA’s Listing Rules (which include rules that are “super-equivalent” to the Directives) to which premium listed issuers are subject. High growth segment issuers therefore do not need to obtain shareholder approval for a transaction that is significant in size or entered into with a related party (provided it does not constitute a reverse takeover); shareholder circulars are generally not subject to prescribed content requirements and need not be approved by the market regulator; and for share buybacks there are no rules that apply on top of the issuer’s company law.

Eligibility criteria for admission

The main eligibility criteria are:

• The issuer must be duly incorporated in an EEA state and be a public limited company or equivalent. This is designed to ensure that all companies admitted to the segment are subject to similar financial services and company law rules. In particular, under the Second Company Law Directive all Member States must put in place similar rules applicable to EEA-incorporated public companies relating to the issue of shares (including pre-emption rights); buybacks; payment of dividends; the giving of financial assistance in connection with an acquisition of the company’s shares; and increases and reductions of share capital. The London Stock Exchange says that it will keep the need for this requirement under review.
• The issuer must be a trading business and not, for example, a mineral resource company at exploration stage or an investment entity. Rather than providing a list of the types of trading businesses that are eligible, the London Stock Exchange asks Key Advisers to contact it at an early stage to discuss the potential eligibility of an applicant.
• The issuer must be able to demonstrate growth in audited consolidated revenue of at least 20% (on a compound annual growth rate (CAGR) basis) over the previous three full financial years. A four year range of financial data is therefore required to calculate the rate of growth.
• At least 10% of securities to be admitted must be in public hands, and there must be a sufficient number of shareholders to provide an orderly market. For admission to the premium or standard segments, at least 25% of the issuer’s shares must be in public hands. No minimum free float is required for AIM. The 10% free float requirement for the high growth segment will enable founder shareholders, including venture capital and private equity investors, to float a smaller percentage of the company at an earlier stage of development, as the company transitions from being private to becoming a publicly traded company.
• The value of the securities in public hands must be at least £30 million, the majority of which must be raised on admission by the issue of new securities or the sale of existing securities from the same class as that to be admitted. For companies with a total value of less than £300 million, more than 10% of their shares will therefore need to be in public hands on admission.
• The issuer must control the majority of its assets.
• A prospectus approved by the FCA or another EEA state competent authority must have been published. It must include a statement that the shares are being admitted to the high growth segment and that the issuer has not had to satisfy the eligibility criteria for the Official List and does not have to comply with the Listing Rules. It must also include a non-binding statement that the issuer intends to apply for admission to the Official List “in the future”. No time period need be specified, but the prospectus must include a statement of how the issuer intends to satisfy the eligibility criteria for the Official List.
• The issuer must have appointed a Key Adviser.

Continuing obligations

Major transactions

An issuer must obtain the guidance of a Key Adviser when it proposes to enter into or undertake a major transaction (referred to as a “notifiable transaction” in the rulebook for the new segment (Rules)) and to announce the terms of such a transaction via a RIS, including certain specified information, as soon as they are agreed. A major transaction is a transaction where one or more of the percentage ratios in the class tests set out in Annex I of the Rules (which mirror those in chapter 10 of the Listing Rules) is 25% or more.

Related party transactions

An issuer proposing to undertake a transaction with a related party must obtain the guidance of a Key Adviser. On entering into a related party transaction, the issuer must make a RIS announcement in the prescribed format. The definitions of “related party” and a “related party transaction” reflect chapter 11 of the Listing Rules: a transaction where any percentage ratio in the class tests is at least 5% is a related party transaction.

Reverse takeovers

If an issuer wishes to undertake a reverse takeover it must obtain the guidance of a Key Adviser. Completion of the reverse takeover must be conditional upon shareholder approval, and the issuer’s admission to trading will be cancelled at or prior to completion of the reverse takeover. If the enlarged entity wishes to be admitted to the high growth segment, it will need to apply for admission as a new applicant and therefore publish a new prospectus.

Notice of the shareholder meeting to approve the transaction must be accompanied by either a prospectus (where one is published) or an explanatory circular that sets out all relevant information necessary to enable shareholders to make an informed decision. In most circumstances, this will mean including the same type of information as for a Class 1 acquisition by a premium segment issuer – including pro forma financial information showing the effect of the transaction on the issuer’s profits, assets and liabilities; three years of financial information on the target group presented consistently with the accounting policies of the issuer; and certain information that would be required for a prospectus (e.g. details of any litigation relating to the target group and the issuer, and a working capital statement).

If after publication of the circular but before the shareholder meeting a material change or new matter occurs, a supplementary circular will be needed.

Key Advisers

Section C and Annex 3 of the Rules set out various provisions relating to Key Advisers, including their role and responsibilities, general notification and record management obligations, the initial and ongoing criteria for approval as a Key Adviser, and how the Exchange will supervise and discipline Key Advisers. In particular, to be eligible to become a Key Adviser a firm must have been approved by the FCA to act as a sponsor to a premium segment issuer.

Transfers of high growth segment shares to be exempt from stamp duty?

In the Budget announced on 20 March the Government said that it “intends, following consultation, to abolish stamp duty on shares quoted on growth markets such as the Alternative Investment Market and the ISDX Growth Market.” Whether transfers of shares in companies admitted to the high growth segment will be exempt from stamp duty will be known for certain only when the Government publishes its response to the consultation later this year.

Comment

Free float percentage

Last year, the FCA consulted on whether the 25% free float requirement applicable to the premium and standard segments should be either raised (with the aim of ensuring that independent shareholders have sufficient power to counterbalance a dominant shareholder, where one is present, and hence of improving corporate governance behaviour) or lowered (to make London a more attractive venue for IPOs, particularly for companies whose owners do not want to relinquish too much control). However, in October last year the FCA acknowledged that views on this question remain very polarised, and accordingly it does not believe that it would be justifiable to make significant changes to the existing free float requirements for premium issuers (although in certain circumstances it may be prepared to allow a free float of 20%). For the standard segment, however, the FCA may allow smaller free floats, provided that there is sufficient liquidity in the issuer’s shares. Details of the FCA’s proposals are expected to be published soon.

Investors who are approached to support a company seeking admission to the high growth segment that will have a free float of less than 25% are similarly likely to be concerned about levels of liquidity in the shares and – particularly if the company has one or more dominant or controlling shareholders – whether the company will in practice adhere to suitable standards of corporate governance. In some circumstances, it may be necessary or advisable for the company to preserve a measure of independence by entering into a relationship agreement with its dominant shareholder(s) – something that the FCA is proposing to reintroduce for premium listed issuers. (For further details see our article “Who is in control? The return of relationship agreements” published on 27 November 2012.) Clearly, though, such concerns are relevant on many AIM IPOs and often are not a significant barrier to obtaining investor support for a promising business, particularly if they are reflected in a pricing discount.

Competition with US markets

In April 2012 the “Jumpstart Our Business Startups Act” (the JOBS Act) was introduced in the United States. The JOBS Act significantly amended US securities laws in order to make raising capital in the United States more attractive to a new category of issuers known as “Emerging Growth Companies” (EGCs). To qualify as an EGC, a company must have total annual gross revenues of less than $1 billion. Among other things, the law eliminates or reduces for a period of time the regulatory requirements (especially those relating to disclosure) imposed on EGCs involved in a public offering of securities.

The JOBS Act is designed to increase the volume of public offerings in the United States, following a notable decline over the last decade. Many of the primary regulatory burdens are lifted to create a more streamlined path to going public for smaller issuers, which should lead to a less expensive and faster route to raising capital.

In 2012, the Securities and Exchange Commission (SEC) saw an increase of approximately 50 foreign private issuers registering with it, and some estimates suggest that there will be over 1,000 foreign private issuers by the end of 2013. However, it is too early to determine whether this increase in registrants is related to the implementation of the JOBS Act, or whether issuers are attracted to the US because of its relatively strong economy.

The foreign private issuers that have been registering with the SEC tend to be technology and life-science companies that have a dedicated investor following, dedicated research coverage and a peer group on the Nasdaq. In the past, Nasdaq has been a popular listing venue for technology and life-science companies world-wide, particularly for UK and European technology businesses. The creation of the high growth segment by the London Stock Exchange, with a minimum free float requirement of only 10% (compared to 25% for the premium and standard segments), certainly offers EEA issuers an attractive alternative to Nasdaq. By comparison, Nasdaq has a flexible free float requirement, which has made it very popular with technology and start-up companies; but it does have distribution rules under which a fixed number and value of shares must be held by non-insiders.

Mineral and resource companies

Mineral and resource companies may well continue to find AIM a more attractive junior market than the high growth segment.

Differences between the premium, standard and high growth segments, and AIM

We have put together a table comparing in detail the eligibility criteria and continuing obligations for each of the premium, standard and high growth segments of the Main Market, and AIM. Please contact one of the authors listed below if you would like a copy.

Source materials

The Exchange’s notice announcing the introduction of the new segment can be found here.

The Rulebook for the new segment can be found here.

Other materials can be found on the webpage for the high growth segment.