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FCA consults on changes to the UK Listing Regime

  • United Kingdom
  • Corporate

12-07-2021

The Financial Conduct Authority (FCA) has published consultation paper CP21/21: Primary Markets Effectiveness Review. The consultation has been launched against a backdrop of consistently declining numbers of IPOs on AIM and the Main Market in the UK and, notwithstanding the significant growth in the UK technology sector, those markets’ continuing failure to attract technology companies, which have largely sought to go public in other jurisdictions, such as the US and China.

The consultation addresses a number of the recommendations set out in Lord Hill’s UK Listing Review Report (discussed in our briefing here) and the Kalifa review of FinTech intended to remove perceived barriers to companies listing in the UK and follows the Treasury consultation on the UK prospectus regime published on 1 July 2021 and considered further in our briefing here.

A new model for the UK listing regime?

The consultation first sets out a general discussion on the purpose of the UK listing regime and how the FCA’s role and oversight interacts with that of the operators of trading venues and seeks views on four potential models as to how it might be structured over the longer term:

  • Model 1: Create a single segment for UK listed companies and set the minimum possible requirements for eligibility for listing.
  • Model 2: Create a single segment for UK listed companies and raise both eligibility and continuing obligations for all UK listed companies to that in the premium segment.
  • Model 3: Maintain two broad segments for UK listed companies (enhanced version of the current regime).
  • Model 4: Maintain two segments for UK listed companies but allow the market to set minimum standards for the ‘alternative’ segment (based on UK Listing Review proposal).

Depending on the responses received to the FCA’s specific questions on each of the above proposed models, the FCA intends to develop more detailed proposals which will then be the subject of further consultation.

Proposed changes to the current regime

In addition to prefacing this wider structural review of the UK listing regime and picking up on matters that were highlighted by Lord Hill’s UK Listing Review Report, the consultation paper also sets out several proposed targeted changes to the current regime to remove perceived barriers to listing (which the FCA considers would be retained as part of and incorporated in any wider structural changes going forward), including:

  • allowing dual class share structures on the premium listing segment in limited circumstances;
  • increasing the minimum market capitalisation threshold for both listing segments for shares in companies (other than funds) from £700,000 to £50 million; and
  • reducing the free float from 25% to 10% for both the premium and standard listing segments.

The key measures proposed by the FCA are considered in further detail below.

  1. Dual class share structures (DCSS)

A DCSS typically involves a class of shares that allows a shareholder (or group of shareholders) to retain voting control over a company that is disproportionate to their economic interest. Such structures are currently incompatible with the premium segment, although are not restricted on the standard segment.

The FCA proposes allowing a targeted and specific form of DCSS within the premium listing segment. This would allow companies on the premium list to have an unlisted class of shares with weighted voting rights. Broadly, holders of unlisted shares with specified weighted voting rights would not be precluded from exercising voting rights attached to those shares on matters relevant to premium listing in certain specified circumstances.

The conditions that would apply include:

  • The structure be limited to a period of a maximum of five years from admission to the premium list (after which time the shares would have to convert to ordinary shares or otherwise expire).
  • Weighted voting shares would only carry weighted voting rights in relation to the prevention of removal of the holder as a director and in relation to any matter put to the shareholders following a ‘change of control’. The latter is intended to operate as a deterrent to a takeover.
  • A maximum weighted voting right ratio of 20:1.
  • Only directors (or a beneficiary of their estate) can hold weighted voted shares.

The FCA are not proposing to amend the rules on controlling shareholders or the requirements that the company carries on an independent business.

  1. Minimum market capitalisation

The FCA proposes changing the eligibility requirements for premium and standard listed companies so that they must have a minimum market capitalisation of £50 million. The requirement would be for new listings only and would not apply as a continuing obligation. The minimum market capitalisation requirement for closed-ended investment funds and open-ended investment companies would remain at least £700,000.

The FCA considers that this would promote liquidity and reduce share price volatility (which tends to be observed in companies with lower market capitalisations) and that other markets, such as AIM or AQSE Growth Market, are generally more suitable for companies with a lower market capitalisation as such companies can find more support in meeting regulatory requirements involving market integrity and market abuse from nominated and corporate advisers that they are required to have on those markets and from an investor base that is more suited to them and understands the risks applicable to smaller market capitalisation companies better.

  1. Minimum number of shares in public hands – ‘free float’

In summary, the FCA is proposing to reduce the required level of shares in public hands or ‘free float’ (i.e. shares not held by directors and their connected persons (and persons entitled to nominate directors), shareholders who have 5% or more of the total shareholding in a company and certain others) from 25% to 10% for both the premium and standard listing segments at listing and as a continuing obligation. In addition, the FCA would remove guidance about applying for a modification of this requirement so that in practice a free float of lower than 10% will not be accepted. Issuers in breach of the 10% requirement would no longer be allowed to show they had liquidity via other means, but would instead be asked to present a plan for coming back into compliance with the rule as soon as possible.

The FCA’s rationale for these changes is that it does not consider that a lower free float would significantly harm stock liquidity and that the current requirement, which is higher than in a number of other jurisdictions, potentially acts as a barrier to certain market entrants when considering an IPO in the UK.

The FCA’s proposals in this respect deviate from those set out in the UK Listing Review report, which had recommended a reduction of the free float requirement to 15% as well as changes to the definition of free float so that institutional investors could count and allowing companies to use other methods of demonstrating liquidity.

Other matters covered

The FCA is not putting forward specific proposals as recommended by the UK Listing Review for rule changes on historical financial track record requirements at this stage, but explores the case for change. In particular, the FCA asks for views on which specific types of high growth innovative companies find the three-year track record requirements a particular barrier to listing.

The FCA is also consulting on some minor changes to the Listing Rules, Disclosure Guidance and Transparency Rules to simplify them and reflect market practice and changes in technology.

Next steps

The consultation closes on 14 September 2021. Subject to feedback, the FCA aims to make the relevant rule changes by late 2021. There may also be further consultation on the wider UK listing regime and its structure in due course (as referred to above).

Comment

This FCA consultation follows its recent consultation on special purpose acquisition companies (SPACS) (the outcome of which is awaited) and the recent HM Treasury consultation on the prospectus regime.

These proposals all highlight the UK Government’s intention to move quickly and use the opportunity presented by the Brexit transition period coming to an end to undertake a wholesale review of the UK capital markets and how they operate and redesign them to make London a more attractive venue for listing. This is particularly the case for the increasing numbers of fast-growing, technology-led businesses in the UK and elsewhere seeking to access the public markets to raise capital to fund the next phases of their growth strategies.

In developing these proposals, the FCA has heeded the calls for change in the UK Listing Review report, albeit departing from those recommendations in certain areas where it considers that introducing more flexibility and reducing barriers to listing whilst at the same time ensuring that adequate standards of governance and investor protections are preserved can be better addressed through alternative approaches or modifications to the recommendations made by Lord Hill. Balancing these twin considerations appropriately will be essential in formulating the relevant rule changes to ensure that London can be a more attractive listing venue as companies’ (and their founders’ and shareholders’) requirements continue to evolve whilst at the same time retaining its reputation for promoting high standards of corporate governance.

Useful Links

FCA Consultation Paper CP21/21 Primary Markets Effectiveness Review