The FCA has advanced its proposals to streamline and enhance the competitiveness of the UK listing regime for equity shares with the publication of a consultation paper setting out a blueprint for reform. Core to the proposals for reform is a single listing category for equity shares in commercial companies (ESCC). This would replace the current premium and standard categories with a simpler, more disclosure-based regime including reduced eligibility criteria for companies seeking to IPO.

Background

The consultation paper, Primary Markets Effectiveness Review: Feedback to DP22/2 and proposed equity listing rule reforms (the Consultation Paper), takes forward, with some changes, the proposals for a single listing segment model initially set out in the FCA's May 2022 Discussion Paper¹. These changes reflect the feedback that the FCA received on the Discussion Paper. In particular, the proposal for a category of optional "supplementary" continuing obligations has not been taken forward.

The Consultation Paper provides a detailed overview of the core aspects of the FCA's intended policy and seeks further feedback from market participants, with a view to a further and more detailed consultation in the autumn.

What does the proposed ESCC change?

Key respects in which the proposed ESCC would differ from the current premium listing requirements include the following.

Eligibility: The current financial eligibility criteria for companies seeking admission to listing, notably the requirements for:

• a three-year financial and revenue earning track record;
• three years' audited historical financial information; and
• a "clean" or unqualified working capital statement,

will be removed. As part of its work on the new prospectus regime, the FCA will consider whether there are any financial information gaps resulting from these changes which need addressing through changes to the financial information requirements in the prospectus rules.

Initial and continuing obligations – independence and control: The current rules that require a listed company to have an independent business and operational control over its main activities will be modified to accommodate a broader range of business models (e.g. franchise-type models and strategic investment companies).

Initial and continuing obligations – controlling shareholder regime: The requirement for a relationship agreement between the listed company and a controlling shareholder will be replaced with a more flexible "comply or explain" disclosure model. Where a controlling shareholder agreement is not in place, specific disclosures and risk factors in the prospectus and annual report will be required.

Initial and continuing obligations – dual class share structures: The approach to dual class share structures will be more flexible than is currently allowed in the premium segment. In particular, the exercise of enhanced voting rights on all matters will be allowed, not just to prevent a change of control or to protect a founder's position as a director. The one exception will be on a vote to approve the issue of new shares at a discount greater than 10% to which the principle of "one share, one vote" will apply. The current sunset period, after which enhanced voting rights shares convert to ordinary shares, will be extended from five to 10 years.

Continuing obligations – significant transactions: The requirement to obtain shareholder approval for Class 1 transactions (other than reverse takeovers) will be removed, along with the associated requirement to publish an FCA-approved circular. A transaction meeting the current Class 1 threshold of 25% will require an announcement to the market in the form currently required for Class 2 transactions. Transactions below the Class 1 threshold will not require announcement.

Continuing obligations – related party transactions: For related party transactions at or above the 5% threshold (on the class tests), the requirement for independent shareholder approval will be removed, along with the associated requirement to publish an FCA-approved circular. While other aspects of the related party rules will remain for these transactions, related party transactions below the 5% threshold will not be subject to specific regulation (though the Market Abuse Regulation will continue to require disclosure of any inside information).

For companies that currently have a standard listing, a listing in ESCC will bring certain additional requirements. These include:

Sponsor regime: The role of the sponsor, not currently required in the standard segment, will be expanded to include all companies in the ESCC. The FCA envisages that the role of the sponsor will largely mirror the role sponsors currently have in the premium segment at IPO, with a modified ongoing role reflecting the changes to continuing obligations.

UK Corporate Governance Code: The existing rules for companies in the premium segment relating to the UK Corporate Governance Code will be extended to all companies in the ESCC. (The FRC plans to launch a consultation on updating the Code shortly.)

Pre-emption rights: The existing rules for companies in the premium segment that control the discount at which further shares can be offered when they are not issued on a pre-emptive basis will be extended to all companies in the ESCC, along with those relating to share buybacks.

Shareholder approval for cancellation of listing: The existing rules for companies in the premium segment that protect shareholders from the cancellation of a listing in the absence of a takeover offer or approval by 75% of shareholders will apply to all companies in the ESCC.

Underpinning the ESCC for all companies within it will be a single set of Listing Principles. These will combine the existing Listing Principles for premium and standard listed companies, with some modifications to promote good corporate governance and accountability.

Issuers and securities outside the ESCC

The current premium and standard listing segments include issuers that are not commercial companies and securities that are not equity shares. The Consultation Paper deals only briefly with these and states that further details will follow in the FCA's autumn consultation. At this stage, the FCA has given the following indications:

Equity shares of closed-ended investment funds: The FCA's approach will remain largely unchanged with any changes to the current premium segment copied across to ensure consistency and proportionality.

Sovereign-controlled commercial companies: These are likely to fall within the ESCC and therefore not be retained as a separate premium listing category.

SPACs and cash shells: The FCA is proposing a new listing category for these entities on the basis that their limited corporate structure and activities prior to finding a target make them inappropriate for the ESCC.

Other equity and non-equity shares: The FCA considers that a category for those existing standard listed issues not eligible to transfer to either the ESCC or the SPAC/cash shell company category may also be necessary. This may include issuers that are currently in the standard listing segment for legacy purposes (such as open-ended investment companies to which Listing Rule 16A does not apply). It would also include non-equity shares (e.g. preference and deferred shares) that are currently eligible for a standard listing. The FCA is also considering overseas incorporated issuers currently in standard listing because their listing in the UK is a secondary listing.

Other standard listing categories: The FCA expects that these categories will remain largely the same:

• open-ended investment companies (subject as mentioned above);
• debt and debt-like securities;
• securitised derivatives;
• miscellaneous securities; and
• certificates representing securities (depositary receipts).

As regards the last of these, the FCA confirms its intention to ensure that this feature of the markets is maintained and not disrupted.

Transitional arrangements

To facilitate the creation of a single ESCC category and a new category for SPAC/cash shell companies, and to maintain market integrity during implementation of the proposed changes, the FCA proposes to ensure arrangements are in place to:

• enable existing issuers of equity shares in commercial companies to transfer from the current standard and premium listing categories to the new single ESCC category;
• enable existing issuers of equity shares which are SPACs/cash shell companies to transfer from standard listing to the new SPAC/cash shell company category;
• enable remaining issuers listed in the standard segment to transfer to the new other shares category; and
• allow issuers that will be affected by the changes sufficient time to prepare and implement necessary changes.

While the FCA does not go into any detail on these transfer arrangements, the Consultation Paper does state that the FCA is not proposing that current Listing Rule 5.4A (transfer between listing categories) will apply to any of the above issuers. The Consultation Paper also notes that, while the FCA's expectation is that existing standard listed issuers that are eligible for the ESCC will transfer to the ESCC, it will consider whether issuers that are not willing or able to transfer should be permitted to transfer to the other shares category. For existing premium issuers, the FCA envisages that the transfer position will be more straightforward than for standard issuers, but notes that some period may be appropriate between the final rules being made and the coming into force date, to allow those companies to adjust to the new requirements.

More detail on these, and related, issues will be given in the autumn consultation.

Next steps

The current consultation closes on 28 June 2023. As already mentioned, the FCA will follow this up with a further consultation in the autumn, which will include a full draft legal instrument setting out the proposed new rules. Subject to consultation feedback and FCA Board approval, the FCA is aiming for an accelerated timetable with "substantial progress" by the end of 2023.

1. See A "UK Listing": the FCA unveils proposals for a new-look UK listing regime to boost growth and competitiveness