UK Listings Review Reports
12 April 2021
12 April 2021
On 3 March 2021, HM Treasury published the UK Listings Review Report (the "Review") further to its Call for Evidence on the UK listing regime, the purpose of which was to "propose reforms that will attract the most innovative and successful firms and help companies access the finance they need to grow" in a post-Brexit landscape. The Review sets out a range of recommendations to modernise the Listing Rules of the Financial Conduct Authority (the "FCA") whilst maintaining the UK's high standards of regulation.
We set out the key recommendations below.
The Review begins by recommending that the Chancellor should present to Parliament an annual report on the state of the City, setting out the progress that has been made over the period under review in improving the UK's competitive position as a well-regulated and dynamic global centre.
Consistent with the overriding aim – to attract companies, particularly fast-growing companies, to list in London - the Review considers updating the FCA's statutory objectives to include a requirement to take into account the UK’s overall attractiveness as a place to do business. This would bring the UK in line with other jurisdictions, such as Australia and Hong Kong, whose financial regulators have competitiveness or growth as an objective; competitiveness had also been an objective of the FCA's predecessor – the Financial Services Authority.
Whilst including the strengthening of London's competitive position within the FCA's remit is welcome, it will be important to balance this against the need to maintain the UK's high standards of investor protection.
With a view to attracting companies in innovative growth sectors, especially founder-led companies, the Review recommends permitting companies with dual class structures to list in the premium listing segment. Such structures, which allow founders to retain control, are well-established in the US - Facebook being a notable example of their employment. However, they are currently only permitted on the standard listing segment, although they were, until relatively recently, also permissible on the premium listing segment. The Review proposes that high corporate governance standards would be maintained via certain restrictions being imposed, including: (i) a maximum duration of five years; (ii) a maximum weighted voting ratio of 20:1; (iii) requiring a holder of B class shares to be a director of the company; (iv) voting matters being limited to ensuring the holder is able to continue as a director and able to block a change of control of the company; and (v) limitations on transfer of the B class shares.
The US permits the use of dual class share structures and this gives a competitive advantage, particularly in the case of founder-led and tech companies whose listings are highly prized. The Review recognises this and seeks to level the playing field here while introducing some corporate governance standards, along similar lines to those which apply in a US context. Other international exchanges have also recently sought to follow the US' lead in this regard. Both the Hong Kong Exchange and Singapore Exchange updated their listing rules in 2018 to permit dual class share structures. As with a number of the recommendations in the Review, it is not so much a case of creating a competitive advantage, but rather removing a self-inflicted competitive disadvantage.
In order to give companies greater choice, and recognising that the standard listing segment was not established with a view to targeting companies of any particular size or type, the Review recommends rebranding and relaunching the standard segment, with "Main Segment" or "Chapter 14" being put forward as potential new names. According to the Review, flexibility should be the principal feature of the rebranded segment and, as part of the segment's relaunch as a venue for companies of all types to list in London, the Review proposes that investor groups be encouraged to develop industry guidelines on areas they see as particularly important, allowing for companies on the relaunched segment to be index-eligible.
The standard listing regime, which was originally based on minimum EU directive standards, is often perceived as a "second class" listing option and standard listed companies are not eligible for FTSE index inclusion. The proposal to rebrand this listing segment is therefore welcome but, beyond flexibility and renaming, the Review leaves a number of questions open as to what form this listing segment will ultimately take in practice.
The current free float requirement is cited as a key deterrent when potential listing venues are considered, particularly for high growth and private equity backed companies. In response to this, the Review recommends that the free float requirement be reduced from 25 per cent to 15 per cent for all companies in both listing segments. The Review looks to competitor listing venues that adopt a more flexible approach, using alternative measures to establish liquidity – the key determinant - and recommends that companies of different sizes should be able to use alternative measures to the absolute percentage of 15 per cent to demonstrate sufficient liquidity. The Review also recommends that the definition of "free float" be reviewed and amended to consider whether the shares are in fact contributing to liquidity.
The FCA has previously made it clear that the rationale for the free float requirement is liquidity and, consistent with this, the FCA has discretion to accept a smaller free float where it considers that the market will operate properly (although it has, on occasion, seemed reluctant to move away from the 25 per cent threshold). However, the Review goes further in proposing a lower percentage and additional flexibility through the use of alternative metrics and, whilst it envisages that the FCA's approval would still be required in assessing the application of the free float criteria, it suggests that this should be a mere confirmatory exercise. In this way, it seeks to reduce the amount of discretion which the FCA has been applying when considering granting a waiver to the 25 per cent figure.
In a bid to make London a viable competitor to the US and, more recently, Amsterdam, the Review suggests a relaxation of the Listing Rules in relation to special purpose acquisition companies ("SPACs") or "blank cheque" shell companies – a key trend in the last year which many believe will continue. Until 2018, upon the announcement (or leak) of a reverse takeover, the presumption of suspension applied for all issuers with a premium or standard listing. Whilst this presumption was removed by the FCA in 2018 in respect of commercial companies, it was retained expressly for shell companies, including SPACs.
The Review cites the rule relating to a share trading suspension as a key obstacle to SPAC listings in London on the basis that investors run the risk of being "locked-into" their investment for an unknown duration following an acquisition announcement. The Review seeks to put SPACs on a level playing field with commercial companies by recommending the removal of the rebuttable presumption of suspension for SPACs, but with appropriate investor protections being put in place, and encourages the FCA to develop rules on the following areas, amongst others: (i) investor rights to vote on the acquisition prior to its completion; and (ii) investor rights to redeem their initial investment prior to the completion of a transaction. The proposals on forward-looking information are also of particular relevance to SPACs (see point 4 below). Time will tell whether these proposed liberalisations, if implemented, will be enough to allow a SPAC market to flourish in London. See below in respect of the FCA's impending consultation on SPACs.
Rather than proposing stop-gap amendments to the existing regime, an urgent and fundamental review of the prospectus regime is recommended to better accommodate the breadth and maturity of UK capital markets and the evolution in the types of companies coming to market, as well as those already listed. Key considerations highlighted by the Review, which advocates a regime more akin to that in place pre-Prospectus Directive and pre-EU Prospectus Regulation, include:
It is difficult to predict the outcome of the recommendations relating to the prospectus regime as the suggestions remain on the level of generalities. It will be interesting to see how the FCA will respond here, particularly in respect of the proposal for alternative listing documentation for secondary fundraisings, given the existence of the simplified disclosure regime under the UK Prospectus Regulation. As with that simplified disclosure regime, US disclosure requirements may in practice limit the usefulness of another "slimline" regime.
Recognising the advantages of dual and secondary listings, including access to a wider pool of investors, the Review recommends maintaining the existing regime for secondary and dual listings. The Review notes that a key way in which to promote dual and secondary listings in the UK would be to consider and develop an "equivalence" regime, allowing prospectuses drawn-up under the rules of another jurisdiction to be used in a UK context for both IPOs and further issuances.
The development of a functioning equivalence regime would potentially be a welcome step. Whether other jurisdictions will reciprocate and recognise UK prospectuses, particularly in light of the fact that the form of UK prospectuses may change, remains to be seen.
The Review acknowledges the current systemic imbalance that requires a company looking to list in London to include three years of backward-looking financial information in its prospectus whilst only permitting approximately half a page of narrative forward-looking information to be included. Responding to market imperatives, the Review recommends an adjustment of the prospectus liability regime for issuers and their directors (under the Financial Services and Markets Act 2000), by adding a due diligence defence, for instance, to encourage the publication of forward-looking information, such as forward-looking models, at IPO and at the time of further issuances. It is, after all, information of this type which investors are understandably keen to see.
This adjustment is recommended for all types of company and would be particularly relevant to SPACs. By comparison, US securities laws provide for a safe-harbour for forward-looking information, which also encompasses SPACs on their first acquisition - the de-SPAC event. In order for London to be viewed as a viable listing venue for SPACs, it is important that an equivalent approach is adopted in the UK.
Currently, forward-looking information tends to be put out into the market via analyst research, rather than the IPO prospectus. A regime which allowed the inclusion of forward-looking information in the prospectus itself would be well-received, but would only be possible if the current prospectus liability regime is amended, which will require primary legislation.
This amendment to the 75 per cent rule, originally included as part of the premium listing segment's "super equivalent" standards, will simplify the eligibility process for companies that have made a significant number of acquisitions during the three year track record period.
A recurring theme throughout the Review is increasing retail investor engagement with the UK capital markets and, in line with this objective, the Review recommends that consideration be given to the use of technology to improve retail investor participation in corporate actions.
The Review also suggests re-establishing the Rights Issue Review Group to consider its outstanding recommendations in terms of capital raising models in other jurisdictions, such as the Australian RAPIDS model, with a view to facilitating a more efficient process for secondary fundraisings and making such fundraisings more retail-friendly.
The consensus seems to be that it is an opportune moment to use modern technology to increase retail participation; the somewhat anachronistic six day rule which applies when a retail element is included in an IPO is a prime example. The rule's rationale is to give retail investors enough time to read the offering document, but it can actually be a deterrent to companies when they are considering the structure of an IPO, leading to the exclusion of a retail offering. With technological advances however, this period can be significantly reduced without prejudicing retail investors.
The Review recommends a reconsideration of the relatively recently introduced conduct of business rules in the FCA Handbook concerning the inclusion of unconnected research analysts in an IPO process, which add seven days to the public phase of the IPO timetable, where unconnected analysts have not been briefed with connected analysts.
Experience to-date suggests that the 2018 rules haven't achieved their goal of increasing analyst coverage, but have in fact increased execution risk and have both timing and cost implications for issuers. It would, therefore, seem sensible to consider their reversal.
Some of the proposals, notably, the reframing of the prospectus regime and the revised approach to forward-looking information, will require primary legislation and, as a result, will need to be considered by HM Treasury.
The FCA, which has welcomed the Review's recommendations, has said that it aims to publish a consultation paper by the summer and, subject to consultation feedback and FCA board approval, to implement rule changes by late 2021. However, the FCA has since confirmed that it will shortly be consulting on amendments to the Listing Rules and related guidance to strengthen investor protections in SPACs. The consultation, which will be open for a four-week period, will consider the structural features and enhanced disclosure required to provide appropriate investor protection, including a minimum market capitalisation and a redemption option for investors. With a framework of appropriate investor protections in place, the FCA suggests that the current presumption of suspension upon the announcement of an acquisition is no longer necessary, thereby aligning the UK with other major jurisdictions. The FCA intends for the new rules and/or guidance in relation to SPACs to be implemented by early summer.