The New UK Listing Rules. Will They Reboot UK Capital Markets?

Overview

On 29 July 2024, the Listing Rules underwent a radical overhaul as part of a broader effort to maintain London’s competitiveness as a global financial centre. With many companies in recent years gravitating towards financial hubs such as New York, Hong Kong, Singapore and Amsterdam, the FCA has sought to attract more companies to the UK public markets with a more permissive approach. The FCA’s reforms streamline the listing process, reduce regulatory burdens and significantly broaden the eligibility criteria for admission. The hope is that these reforms will arrest the general malaise that has beset the UK capital markets over the last 15 years, as illustrated by the graph below^[1]:

There are various reasons for the general decline in London IPOs, not all of which relate to the broken regulatory framework that the FCA is now trying to fix. For example, over the last decade or so many start ups have increasingly shunned the capital markets altogether in favour of private capital that has proved to be a more flexible, long term and substantial source of capital.

The London capital markets have also historically had a high concentration of mining and oil and gas companies that represent in some ways the “old economy”. London has not however been perceived as a natural home for “new economy” companies in the technology and AI sectors. Although the UK has been very successful at incubating technology start ups over the last 20 years, whose growth has been turbo charged by the tax reliefs offered to angel and high net worth investors under the EIS and VCT regimes, the UK has not been successful at scaling these companies once they become “IPO ready” and look to join the public markets. This has not only resulted in missed opportunities for the UK capital markets, but also for the economy as a whole given that many of these companies who list overseas also tend to move many of their employees and operations overseas, resulting in lost job opportunities and tax revenues for the UK. 

So the attempt to fix the listing rules should not be viewed in isolation. It is part of a broader campaign by the UK government to stimulate more growth into the UK economy and harness to greater effect the talent and capital within the UK. 

The Road to Reform…

The new UK Listing Rules are the culmination of a 4 year review process that began with the publication of Lord Hill’s UK Listings Review and the Kalifa Review in 2021. These reviews were aimed at making the UK more competitive in global financial markets. In response the FCA introduced several rule changes in 2021 including:

• dual-class share structures, which allow founders, through holding a separate class of shares with weighted voting rights, to retain greater control post IPO;
• reducing the free float requirement (i.e., the number of shares in public hands) from 25% to 10%, thereby aligning the UK more closely with other major financial centres such as New York and Hong Kong which allow founders of smaller companies to retain a greater portion of their equity and therefore control;
• increasing the minimum market capitalization of an issuer from £700,000 to £30 million, thereby raising the bar for a listing and effectively excluding micro cap companies without the financial resources or, in some cases, management expertise to comply with the listing rules.

These rule changes in 2021 set the wheels in motion for further consultations by the FCA over the following years on areas such as the prospectus regime and secondary offerings.

New Listing Categories

The UK Listing Rules now include 11 listing categories in total catering for equity securities, non-equity securities, debt securities, closed-ended investment funds, depository receipts, open-ended investment companies, securitised derivatives and convertible securities.

One of the most significant changes however is the consolidation of the two-tier listing structure that was split between the premium listing and standard listing segments, into a single listing category called “equity shares (commercial companies)”^[2]. Premium listings required companies to meet the highest regulatory standards, whereas standard listings offered lighter regulation but were often viewed as less prestigious, with lower investor confidence and liquidity. The new “ESCC” category is in broad terms less onerous than the premium listing segment, but slightly more burdensome than the standard listing segment.

The removal of the two-tier listing structure and the creation of a unified ESCC category aligns the Official List with other international markets. The hope is that simplifying the listing regime should make the markets more accessible for both issuers and investors. 

Standard listed companies have either been “mapped” to a new “equity shares (transition)” category, or to other specialist categories, as applicable, such as the new “international commercial companies secondary listing” category (see below), or to the “equity shares (shell companies)” category.

The “transition” category maintains the same rules as applied to standard listed companies prior to 29 July 2024, so those companies do not have to adhere to the higher standards that apply to companies in the ESCC category. The “equity shares (transition)” category is closed to new entrants and the expectation is that companies in this category will eventually migrate towards other listing categories or delist. 

A new listing category of equity shares has also been created for overseas companies, whose primary listing is on a non-UK market. This category - equity shares (international commercial companies secondary listing) – effectively maintains the standard listing rules with additional obligations relevant to secondary listings.

ESCC Eligibility

The eligibility criteria for admission to the ESCC category largely reflects the previous premium segment rules. However, to attract earlier stage and high growth companies to the market, issuers are no longer required to provide^[3]:

• a three year revenue earning track record;
• historical financial information relating to 75% of the issuer’s business;
• evidence of an independent business and operational control of their main business activities;
• a clean working capital statement.

The expectation is that earlier stage / pre-revenue companies, as well as highly acquisitive companies and companies with alternative business models (i.e., those investing in minority equity stakes in other entities, royalties etc.) will be encouraged to list. Under the previous rules they would have been unable to satisfy the eligibility requirements.

Companies are also no longer subject under the UK Listing Rules to any maximum limit on the number of warrants or options to subscribe for equity shares that may be issued (previously this was set at 20% of the issued share capital). This should allow companies with more complex capital structures to list and have more choice in how their capital raisings are structured. Early stage and high growth companies with existing warrants and convertible shares may now be more open to considering an IPO on the main market in London.

Despite the general relaxation of the eligibility criteria however, the board of the company applying for its securities to be listed must nevertheless provide a confirmation at admission that it has appropriate systems and controls in place to ensure it can comply with its ongoing listing obligations and the UK listing principles. The listing principles emphasise that the directors are responsible for implementing reasonable steps to ensure that adequate corporate governance arrangements are established and maintained.

Significant Transactions

Unless the transaction constitutes a reverse takeover, ESCC companies are no longer required to appoint a sponsor, seek shareholder approval or publish a circular in respect of significant transactions (where any class test percentage ratio is 25% or more) that are not in the ordinary course of business. ESCC companies are instead required to provide more detailed information about the financial impact, strategic rationale, and the benefits and risks associated with such transactions.

ESCC companies are also afforded more flexibility around the timing of disclosures relevant to the transaction, so additional information can be released to the market as soon as it becomes known or has been prepared.

An initial announcement (stating why the transaction is notifiable under the UK Listing Rules and including an overview of the transaction) must be made as soon as the terms of a transaction are agreed, but can then be followed by a further announcement containing additional non-financial information (summarising material contracts and significant litigation) and (for disposals only) financial information relating to the target of the transaction as soon as the information has been prepared or the company becomes aware of it, and in any event no later than completion of the transaction. This is useful where information may not be known at the outset of a transaction and only becomes known as due diligence progresses. The rules also require a notification to confirm when a transaction has completed (and that there have been no material changes other than as disclosed).

Other changes to the regime include the removal of the profits test from the class tests (because it tended to produce anomalous results) and break fees of 1% or more of market capitalisation are no longer considered to be significant transactions.

These are minimum disclosure requirements however and ESCC companies always remain subject to their disclosure obligations under the Market Abuse Regulation and the overriding duty to maintain an orderly market in their shares.

The abolition of the requirement to obtain shareholder approval for significant transactions removes one of the frictions that the listing rules presented when UK companies engaged in M&A processes. No other major listing venues require similar approvals, and so UK companies found themselves at a significant competitive disadvantage as they were unable to provide deal certainty to sellers.

Related Party Transactions

The new UK Listing Rules have also dispense with the requirement for shareholders to approve related party transactions outside the ordinary course of business that meet the 5% class test. These are now subject to the requirement for a market notification, a sponsor’s “fair and reasonable” opinion, and board approval (excluding any conflicted directors from taking part). 

Furthermore, a “substantial shareholder” is now defined as a shareholder holding at least 20% of the voting rights (increased from 10%) so fewer transactions will be caught by the rules.

To simplify matters, ESCC companies will also no longer be required to also comply with the separate related party regime in DTR7.3.

The new disclosure based regime leaves investors to make their own assessment about the merits and risks of proposed transactions and act accordingly.

Shareholder Approvals

Shareholder approval will continue to be required under the UK Listing Rules for the following corporate actions:

• reverse takeovers;
• the adoption of an employees’ share scheme or long-term incentive plan;
• grants of discounted options;
• the issue of shares on a non pre-emptive basis at more than a 10% discount;
• certain share buybacks.

Although the UK Listing Rules significantly empower the board, the requirement for shareholder approvals under other legislation still apply and are unaffected by the new Listing Rules. For example, shareholders will continue to be required to authorise the board to allot shares under the Companies Act 2006 and independent shareholders will continue to be required to approve Rule 9 waivers under the Takeover Code.

Enhanced Flexibility for Dual-Class Share Structures (DCSS)

The UK Listing Rules have expanded the DCSS regime that was introduced in 2021 following the Lord Hill recommendations. In addition to founders, pre-IPO institutional or corporate investors may now also hold shares with weighted voting rights, with such weighted voting rights being subject to a maximum 10-year sunset provision. A holder of shares with weighted voting rights is not permitted to transfer the weighted voting rights to any third party. This change mirrors the approach in the US, where a number of UK businesses have listed in recent years, attracted not only by higher valuations, but by the latitude provided by the rules for founders and investors, typically VCs, to retain greater control over the company. 

There are some matters however in respect of which weighted voting rights cannot apply, such as on a proposal to issue shares at a greater discount than 10%, cancellation of listing, approval of employee share schemes, LTIPs and a transfer out of the ESCC category.

Traditionally, the UK’s rules around share structures were more rigid than other markets, with a strong preference for a one-share, one-vote principle. While this ensured equality among shareholders, and was promoted on the basis of sound corporate governance, there has been a growing realisation that ultimately this was to the detriment of investors who were missing out on access to innovative founder led businesses.

Controlling Shareholder Agreements

Another deregulatory step taken by the FCA is the relaxation around the rules relating to controlling shareholders (being persons controlling 30% or more of the voting rights). The listing rules require companies to be able to carry on their business independently from any controlling shareholder at all times. There is, however, no longer any requirement for companies to enter into agreements (typically referred to as “relationship agreements”) with such persons.

The new listing rules however do stipulate that if any controlling shareholder proposes a shareholder resolution that a director considers is intended to circumvent the proper application of the listing rules, then the circular must include a statement by the board of the director’s opinion in respect of the resolution.

Sponsors

Sponsors are still required for ESCC companies, shell companies and closed end investment funds at the application and listing stage - similar to a sponsor’s role in respect of admission of a company to the previous premium listing segment.

However, sponsors will now have a reduced role following listing, largely limited to:

• reverse takeovers;
• related party transactions where a sponsor must provide a “fair and reasonable opinion”;
• where a company is required to publish a prospectus in connection with an application for admission of further shares;
• transfers into or out of the ESCC category (e.g. from the transition category to the ESCC or from the ESCC to the shell companies category);
• any requests for individual guidance from the FCA, or for the waiver or modification of the significant transactions regime, including the class tests, or the related party transactions regime.

The role of the sponsor is integral to reassuring investors that issuers are operating in compliance with the listing rules. Although there are fewer circumstances in which an issuer is required to engage a sponsor, there are also fewer circumstances in which shareholders can veto transactions, so the sponsor will retain a key role as the guardian of market integrity and the link between the listed company and the FCA.

“Shell Companies” / SPACs

The FCA has set time limits, which are required to be enshrined in listed company’s constitution, within which shell companies admitted to the Equity Shares (Shell Companies) category must complete an initial transaction. If these time limits are not met, the company is required to cease operations. These time limits are set at 24 months from admission to complete an initial transaction, but with additional flexibility to extend by 12 months on three occasions, subject to shareholder approval, which can be extended for a further period of up to six months in certain circumstances (intended to address the scenario where a deal has been announced or is near to completion). A sponsor will be required at admission and for the initial transaction. 

Conclusion

The new UK Listing Rules seek to restore the UK capital markets back onto the agenda for high growth companies that have in recent years listed overseas. By adopting a less interventionist approach and aligning the listing regime with many of the UK’s competitor markets, the FCA has addressed many of the friction points that have beset existing listed companies in the UK and deterred new entrants.

Reform of the listing rules however is only one part of the equation. Other factors, such as the availability of deep pools of capital and cultural attitudes towards investing, all contribute to a healthy capital markets ecosystem. The Edinburgh Reforms, which aim to modernise many aspects of the UK’s financial regulations post Brexit, and proposals to reform the UK pension industry to boost investment in UK equities is also key, given that only 2% of pension funds are currently invested in UK equities. This must all be fixed if the UK capital markets are going to play their role as an engine for growth in the UK economy in the future. Without the capital to back new IPOs the reforms to the listing rules will all be in vain.

Moving to a disclosure based regime will equate to more risk for investors who will need to engage even more with companies. Boards will have more autonomy, but this may ultimately result in more shareholder activism in the absence of a shareholder veto and other regulatory guardrails. Large institutional shareholders may also push more for board representation if they feel necessary.

A number of institutional investors are unhappy that the FCA has, in their eyes, undermined the UK’s reputation for high quality listing and governance standards (which is seen as a positive differentiator for the UK market in a global context). Time will tell whether the FCA, who had to consider a range of stakeholder views during the consultation process, has, by handing considerable power to the board, achieved the right balance.

The FCA will carry out a formal post-implementation review of the listing regime in five years to assess the impact of the new Listing Rules. The FCA indicated that it will focus in particular on the more radical aspects of the new rules, including DCSS structures and existing issuers undertaking significant or related party transactions, to ensure that market integrity is maintained. It has further noted that it will not hesitate to intervene prior to this date, if required to deliver its statutory objectives.

The FCA is also reforming the UK’s prospectus regime, with the aim of finalising the rules in the first half of 2025, as part of its broader efforts to introduce greater efficiency and proportionality into the UK capital markets. We will provide a further update on the new prospectus rules in due course.