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UK's FCA announces listing overhaul

The UKs Financial Conduct Authority (FCA) has announced a sweeping overhaul of the country’s stock market listing rules.

This decision, described as the “most radical shake-up of listing requirements in 30 years,” aims to reinvigorate the London Stock Exchange (LSE) and position it as a more attractive destination for both domestic and international companies seeking to raise capital.

The FCA’s move comes at a critical juncture, as the UK has struggled to keep pace with other global financial hubs in attracting high-profile initial public offerings (IPOs), particularly in the technology and innovation sectors.

By streamlining the listing process and introducing greater flexibility, the regulator hopes to unlock new avenues for corporate financing and bolster the competitiveness of the UK’s public markets.

Embracing a Single Category

At the heart of the FCA’s reforms is the creation of a unified listing category, dubbed the “Commercial Companies Equity Shares” (CCES). This consolidation of the existing premium and standard listing segments represents a significant departure from the previous tiered structure, which had been in place for over three decades.

The new CCES category will apply a consistent set of obligations to all listed companies, eliminating the distinction between premium and standard listings. This simplification is expected to enhance issuer and investor confidence, as the regulatory requirements will be more streamlined and transparent.

Alongside the CCES, the FCA has also introduced separate listing categories for specialized entities, such as closed-ended investment funds, open-ended investment companies, shell companies, and special purpose acquisition companies (SPACs).

Additionally, the regulator will establish a transitional segment to accommodate existing standard-listed issuers, allowing them to adapt to the new unified framework over time.

Attracting a Wider Range of Businesses

In a bid to broaden the appeal of the UK’s public markets, the FCA has significantly relaxed the eligibility requirements for companies seeking to list on the CCES. This move aims to attract a more diverse range of businesses, particularly those operating in high-growth sectors of the global economy.

One of the key changes is the removal of the previous premium listing requirement for a three-year revenue-earning track record. This barrier has often deterred innovative, founder-led companies with shorter operating histories from considering the UK as a viable listing destination.

By eliminating this constraint, the FCA hopes to open the doors for younger, high-potential enterprises to access public capital markets.

Additionally, the FCA has done away with the need for companies to provide historical financial information covering 75% of their business activities. This relaxation of disclosure requirements is expected to further streamline the listing process and make the UK a more appealing option for a wider range of companies.

Reduced Shareholder Approval Requirements

A significant aspect of the FCA’s reforms is the reduction in the mandatory shareholder approval requirements for certain corporate transactions. This shift towards a more disclosure-based approach is intended to enhance the agility and competitiveness of UK-listed companies.

Under the new rules, transactions meeting the 25% threshold on the class tests (Class 1 transactions) will no longer require compulsory shareholder approval or an FCA-approved shareholder circular. Instead, companies will be required to release a transaction announcement, accompanied by relevant disclosures to enable shareholders to assess the terms and impact of the deal.

Furthermore, the FCA has also eased the requirements for larger related-party transactions. While the board (excluding any conflicted directors) will still need to approve such transactions, the need for shareholder approval or an FCA-approved circular has been eliminated. Companies will be required to publicly state that the transaction has been determined to be “fair and reasonable” and obtain confirmation from a sponsor.

These changes are expected to provide UK-listed companies with greater flexibility and agility in executing strategic transactions, potentially enhancing their competitiveness on the global M&A stage.

Embracing Founder-Led Innovation

One of the more contentious aspects of the FCA’s reforms is the introduction of a more flexible approach to dual-class share structures. Previously, such structures were only permitted in the standard listing category, while premium-listed companies faced strict limitations.

The new rules aim to address this disparity by removing the caps on the maximum enhanced voting ratio that can be attached to dual-class shares. Additionally, the mandatory time-related sunset period on enhanced voting rights has been eliminated, and the eligibility for these rights has been expanded to include not only directors but also employees and individual investors.

This shift in stance on dual-class share structures is a deliberate attempt by the FCA to attract innovative, founder-led companies that may have previously shunned the UK market due to concerns over maintaining control and voting power. By embracing these more flexible ownership structures, the regulator hopes to level the playing field and make the UK a more attractive listing destination for high-growth, technology-driven businesses.

Refining the Role of Gatekeepers

Alongside the changes to the listing structure and eligibility criteria, the FCA has also proposed revisions to the sponsor regime. Sponsors, who play a crucial role as gatekeepers in the IPO process, will continue to be required for companies seeking a CCES listing, as well as for closed-ended investment funds and shell companies.

However, the FCA envisions a more streamlined involvement of sponsors post-listing. Their primary focus will shift to significant capital-raising events, the provision of “fair and reasonable” opinions on related-party transactions, and instances where issuers seek guidance or waivers on FCA rules. This reduction in the sponsor’s ongoing involvement is aimed at lowering the regulatory burden and cost for listed companies.

The FCA is also consulting on potential modifications to the sponsor competency requirements, with the goal of ensuring that the regime remains fit for purpose in the context of the broader listing reforms.

Strengthening Investor Protections

While the FCA’s reforms are primarily focused on simplifying the listing process and attracting a wider range of companies, the regulator has emphasized the importance of maintaining robust investor protections. Despite the reduction in certain mandatory approval requirements, key safeguards remain in place.

Shareholder approval will still be required for critical events, such as reverse takeovers and decisions to delist a company’s shares. Additionally, the FCA has retained the controlling shareholder regime for CCES-listed companies, ensuring that issuers with a controlling shareholder must demonstrate their ability to operate independently.

These measures are designed to strike a balance between streamlining the listing process and preserving the confidence and trust of investors in the UK’s public markets.

Timing and Implementation

The FCA’s new listing rules are set to come into effect on July 29, 2024, marking a significant milestone in the transformation of the UK’s capital markets landscape. The regulator has proposed a comprehensive overhaul, including the creation of a new “UK Listing Rules” sourcebook to replace the existing Listing Rules.

The consultation period for the proposed changes is currently underway, with the FCA seeking feedback from market participants and stakeholders. Following this consultation process, the final UK Listing Rules are expected to be published in the latter half of 2024, allowing a two-week transition period before the new regime takes effect.

Potential Impact and Challenges

The FCA’s sweeping reforms to the UK’s listing rules have garnered a mixed response from industry experts. While many have praised the regulator’s efforts to make the UK’s public markets more attractive and accessible, some have voiced concerns about the potential implications.

Adam Zoucha, Senior Vice President at FloQast, highlights the significance of the changes, noting that this is “the most radical shake-up of listing requirements in 30 years.” He emphasizes that the UK is “rolling-out the red carpet” for big-ticket IPOs by cutting red tape and simplifying compliance.

However, Zoucha also cautions that the reduction in mandatory reporting requirements should not be interpreted as a relaxation of due diligence and transparency standards. Instead, he believes that it will increase investors’ appetite for continuous disclosure and place a greater onus on pre-IPO and listed companies to demonstrate strong financial discipline and governance.

Chris Beckett, Head of Equity Research at Quilter Cheviot, echoes this sentiment, stating that while the reforms are “admirable,” the listing rules are not the only factor contributing to the London market’s struggles. Beckett points to the dominance of large legacy industries, which have fallen out of favour, as a more significant challenge.

Additionally, Beckett highlights the difficulty of attracting high-growth, technology-focused companies in a digital age, where investors are increasingly drawn to the US market for better valuations and access to innovative businesses. He emphasizes the need to balance the desire for attracting new listings with maintaining appropriate standards and investor protections.Image

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