Practical consequences of the changes to the FCA listing rules on significant transactions

1. Introduction  

On 11 July 2024, the Financial Conduct Authority (FCA) published a new set of listing rules that will come into force on 29 July 2024. The new rules aim to simplify and streamline the regulatory framework, reduce the administrative burden on issuers, and enhance investor protection and market integrity.

One of the most significant changes in the new rules is the revision of the regime for significant transactions by listed companies. These are transactions that have a material impact on an issuer's business, assets, liabilities, financial position, or prospects. Such transactions were historically classified as either class 1 or class 2 transactions, depending on their size and nature. Class 1 transactions were subject to more stringent requirements, such as requiring  publication of a circular, shareholder approval and sponsor confirmation. Class 2 transactions were subject to less onerous requirements, generally only requiring an announcement with minimum content requirements.

The new regime replaces the class 1 and class 2 categories with a single category of significant transactions, which will be subject to a uniform set of requirements.  These new requirements remove the need for shareholder approval of large transactions (and the publication of an associated shareholder circular), replacing them with a broader disclosure obligation.  In addition, the “profits test” no longer applies as one of the tests used to determine whether a transaction is a  significant transaction. 

Issuers should note that the new disclosure regime is in addition to any disclosures required to be made under the Market Abuse Regulation (MAR) as it applies in the UK. 

2. The historic regime 

Under the prior rules, transactions were tested by reference to four tests:

• The gross assets test: the gross assets the subject of the transaction relative to the gross assets of the issuer's group.
• The profits test: the profits attributable to the assets the subject of the transaction relative to the profits of the issuer's group.
• The consideration test: the consideration for the transaction relative to the market capitalisation of the issuer.
• The gross capital test: the gross capital of the company or business being acquired relative to the gross capital of the issuer.

A transaction is classified as a class 1 transaction if any of the above tests are met at the 25% or higher level and as a class 2 transaction if any of the above tests are met at the 5% or higher level.

Under the historic rules, a class 1 transaction triggered the following requirements:

• The issuer must obtain the prior approval of its shareholders for the transaction.
• The issuer must publish a circular containing the information required by the FCA and send it to its shareholders and the FCA. This information included historical financial information on the target and a working capital statement and no significant change statement in respect of the issuer.
• The issuer must appoint a sponsor to provide guidance and confirmation on the transaction.

A class 2 transaction triggered the following requirements:

• The issuer must announce the transaction as soon as possible after the terms have been agreed.
• The announcement was required to contain specified details about the parties and the business being acquired.

3. The new regime applying to significant transactions

Under the new rules, the class tests have been amended so that:

• The profits test no longer applies.
• The other tests remain but the threshold for transactions to which the rules apply is 25%.

The types of transaction which are caught are largely unchanged and there continues to be an exemption for transactions in the ordinary course of business.  However, the new rules contain additional guidance as to what the FCA would normally regard as being in the ordinary course of business and what would not.  Normally, acquisitions and disposals of businesses would not be regarded as being in the ordinary course of business. The new rules continue to apply to exceptional indemnities which carry either unlimited liability or a cap equal to or more than the issuer’s last three years’ profits but break fees will no longer continue to be treated as significant transactions in their own right.

There are specific rules for the application of the class tests to property companies, mineral companies and joint ventures, as well as anti-avoidance rules requiring the aggregation of transactions with the same person(s) or relating to the same part of the issuer’s business.

The main change in the rules is that a less onerous regime applies to what would previously have been considered class 1 transactions.  Under the new rules, the issuer has the option of providing all of the required information either in a single announcement when the terms of a transaction have been agreed or otherwise to issue an initial set of disclosures when the terms of a transaction are agreed, with a follow on announcement containing the remaining details to be issued by no later than completion of the transaction.

In particular, under the new rules, unless the transaction is a reverse takeover (that is, where any of the class tests exceeds 100%):

• there is no requirement to obtain shareholder approval of the transaction; and
• there is no requirement to produce a shareholder circular, thereby avoiding the need to have a circular reviewed and approved by the FCA, or to give a working capital statement (which would need to have been reviewed and reported on by reporting accountants).

Reverse takeovers remain subject to a shareholder vote and continue to be treated as a new listing, assuming the issuer wishes to retain its listing.

4. Key information to be disclosed

The key information to be included under new disclosure regime is separated into four different categories:

• information to be disclosed as soon as possible after the terms of the transaction are agreed;
• information to be disclosed as soon as possible after the terms of the transaction are agreed but in any event before completion of the transaction in all cases;
• additional financial information to be provided by the issuer on a disposal; 
• additional requirements if the issuer discloses synergy benefits or pro forma information; and
• an announcement when completion occurs confirming that there has been no material change affecting the information contained in the prior announcements relating to the transaction.

Whenever an announcement includes financial information, the announcement must include details of the sources of the information, whether it was extracted from audited accounts and where the basis of preparation of that information can be found.  Where non-statutory figures or calculations are used, the announcement needs to include an explanation to allow investors to understand the context and relevance of those numbers.

The key content requirements in respect of relevant announcements and disclosures are as follows: 

Initial announcement

• details of the transaction, parties, rationale for the transaction and consideration;
• description of the business the subject of the transaction, its gross assets and net profits;
• effect on the issuer, including on its earnings and assets and liabilities;
• use of proceeds if the transaction is a disposal;
• key individuals of the business the subject of the transaction (and any service contracts of any such persons who will join the issuer’s board following completion); and
• if a joint venture, details of any exit arrangements.

Subsequent announcement (all transactions)

• details of any material contracts entered into in the previous two years, other than in the ordinary course of business, for both the issuer and the business being acquired or disposed;
• details of any legal or arbitration proceedings over the previous 12 months which have had or would have a significant effect on the issuer;
• details of any related party transactions which are relevant to the transaction and which have not been previously disclosed; and
• details of any significant change in the issuer’s financial position since its last audited accounts.

Subsequent announcement (disposals only)

• issuer’s latest consolidated annual balance sheet and the last two-years’ consolidated income statements (as well as for the latest interim period if the issuer has published interim accounts);
• if the target’s shares are listed and accounted for by the issuer as an investment, dividend and share price information;
• if the target is equity-accounted for by the issuer, the line entries relating to the target from the issuer’s latest annual consolidated balance sheet and consolidated income statements for the previous two years, together with interim information if the issuer has published interim accounts; and
• if the information in the previous two bullet points is not readily available, an explanation as to how the level of consideration was determined and a statement that the issuer’s board considers it to be fair as far as the issuer’s shareholders are concerned.

All announcements

Where an issuer includes the following types of additional information:

• Synergy benefits: where estimated synergies or quantified estimated financial benefits are disclosed, the following information must also be included:
  • the reasons why those benefits are expected to arise;
  • analysis and explanation of the constituent elements of the benefits, when they are expected to be realised and whether they are recurring;
  • base figure for any comparison; and
  • a statement that the benefits would not be achieved without the transaction and that the benefits reflect any relevant costs as well as benefits.
• Pro forma financial information: where pro forma financial information is disclosed, the following information must be included:
  • sources of any unadjusted information; and
  • explanation of the basis of preparation for the pro forma information.