By Natalie Stewart and Tobias Clapp
On 3 May 2023, the Financial Conduct Authority (“FCA”) released a Consultation Paper which detailed proposed changes to the Listing Rules for companies listed on the London Stock Exchange Main Market and AIM. The consultation period will run until 28 June 2023. The FCA also intends to publish a further follow-up paper to address the wider changes to the rules later in 2023.
Why are the changes required?
The FCA announced the reform with the aim of streamlining the current listing rules to attract a wider range of companies to list in the UK, to improve choice for potential investors and to encourage competition. The Financial Times reported a 40% drop in UK initial public offering (IPO) listings since 2008, in spite of the government’s efforts to attract more UK listings during the same period.
The decline in UK IPO activity over the past 15 years has been compounded in more recent years as well, with 2022 seeing a £15 billion reduction in equity raised from IPOs from the previous year. It is right that the adverse macroeconomic and geopolitical environment during 2022 directly contributed to the stagnation of UK IPO activity. While many other countries saw a similar trend of a reduction in IPOs, it is clear that the UK saw greater declines than most. More recently, Arm Ltd, a Japanese owned and Cambridge based microchip designer, has indicated it will choose the New York Stock Exchange for its floatation (as opposed to the London Stock Exchange) citing the onerous rules imposed by the FCA as the primary reason for the decision.
What changes are being considered
The most substantive change being proposed is to the listing segments for equity shares in commercial companies. Currently there are two listing segments: the first for standard listings and the second for premium listings. The proposed amendment would combine these two segments into a single segment, thereby harmonising the method of listing for all equity shares in commercial companies. While this proposal would see a slight increase in the regulatory impact on standard listed issuers, it would have a marked decrease on the requirements currently imposed on premium listed companies. This amendment would make the UK system more similar to other jurisdictions such as the USA, who favour a more disclosure-based approach. The FCA has stated that this could lead to greater risk of failure for younger companies and could encourage companies to pursue risker transactions after listing; however, this will be likely offset by the wider benefits of a more diverse range of companies listing in London and greater investment opportunities generally. With more varied types of companies being able to consider floating on the Stock Exchange, investors will benefit from a broader choice of investment options.
In order to facilitate the creation of the new combined listing segment while still maintaining market integrity, the FCA will allow existing issuers to transition from their current listing category into the new combined segment. The FCA has promised to provide sufficient time to prepare and implement these changes to all issuers that require it. The length of time companies will be given to transition has yet to be published.
Following the creation of a combined listing segment, the current sponsorship regime will also be subject to lighter regulation. While a sponsor declaration will still be required for an IPO, the role of a sponsor will be greatly reduced after the IPO is complete. The role of sponsors post IPO will be limited primarily to providing opinions when an issuer wishes to undertake a related party transaction or assisting in relation to significant transactions. This also means that the sponsor’s declaration in relation to significant transactions will no longer be required and will be replaced by a prescribed content requirement, which requires the issuer to provide an announcement to the market instead. These changes are designed to relax the current regime imposed on companies that would have previously been considered a premium listing while not imposing any further burden on companies that would have been considered standard listings, as these companies were already subject to similar obligations under the UK Market Abuse Regulation. Ultimately, the FCA’s goal in reforming the role of sponsors is to ensure consistency of treatment for all commercial companies and therefore safeguarding market integrity through focused high-quality expert advice from sponsors.
As detailed above, issuers listing in the new combined listing segment will be required to adhere to the related party transaction rules. These rules will represent yet another relaxation of requirements on companies that would have previously been categorised as premium listings, as it removes the need for independent shareholder approval and an FCA-approved circular in certain circumstances. Sponsors will however still be required to provide a fairness opinion.
Currently, a company that wishes to undertake an IPO must be able to provide three years of consistent records, a financial statement representing 75% of their business and a clean working capital statement. This requirement will be removed, allowing for more companies to be eligible to list on the London Stock Exchange’s Main Market with the desire that this will attract younger companies in more preferred industries such as technology or companies with non-conventional corporate structures which would have previous been precluded from listing.
The combined listing segment will also require all issuers to provide a FCA-approved circular to obtain a majority shareholder approval (75% or more in this case) at the point of delisting. The consequential loss of transparency that delisting involves for investors investing in companies that would have previously been standard listed companies will now be offset by the mandatory provision of this circular.
The FCA has stated that the decision by any firm to list on a particular market is based on a number of factors such as availability of capital and taxation. The UK has also in the past been considered to have a complex regulatory environment for listing companies on the London Stock Exchange. The changes to these regulations and listing rules above are part of a wider plan to provide more transparency for investors and sponsor oversight to ensure FCA standards are maintained. Further changes to eligibility requirements will encourage early-stage companies to consider an IPO and the removal of mandatory shareholder votes on certain transactions will allow companies pursuing activities such as acquisitions to do so more freely.
If you have any questions about this post, please contact Natalie A. Stewart or any of the attorneys in our Banking and Finance Industry Group with whom you are in regular contact.