A new dawn for the UK’s capital markets: FCA publishes its Primary Markets Effectiveness Review

Background

Since 2008, the number of listed companies in the UK has fallen by 40% and, between 2015-2020, the UK accounted for just 5% of global IPOs[1]. Indeed, certain growth companies have publicly expressed their reasons for bypassing the UK’s equity capital markets as a potential listing destination.  Together with the uncertainty relating to the UK’s departure from the EU, a restrictive UK regulatory environment is often cited as being responsible from deterring founder led growth or acquisitive companies from seeking a premium listing.

In a bid to boost the UK’s competitiveness as an attractive listing destination, the Government created a taskforce which launched the UK Listing Review, chaired by Lord Hill and the Kalifa Review of UK Fintech. Both reviews, amongst other things, highlighted certain elements of the UK listing regime which act as barriers to entry to the UK’s listing regime for some companies.  To address some of these issues, the FCA has published a consultation paper CP 21/21 “Primary Markets Effectiveness Review”. 

The paper has two purposes: (i) to seek views on the purpose of the UK listing regime and suggest potential models for future reform and (ii) to propose specific changes to the Listing Rules (“LRs”) to enhance the UK’s competitiveness and remove barriers to entry to its capital markets. We summarise the key points for you to note.

Reform of the UK’s listing regime

The FCA seeks views on four potential models for the structure of the UK listing regime:

• Model 1 – A single segment for UK listed companies which has the minimum possible requirements for eligibility for listing - as currently required in the standard listing segment. Issuers would need a prospectus for admission and have systems and controls in place to comply with UK MAR and ongoing disclosure obligations. Premium listing requirements involving track record, shareholder protection and governance and the requirement for a sponsor could be removed. However, trading venues and indices would need to set their own admission criteria and possible continuing obligations which would be independent of the LRs.
• Model 2 – A single segment for UK listed companies where both eligibility and continuing obligations for all UK listed companies are raised to the level set for the premium segment. Consequently, there would be no standard listing segment for UK companies and companies that could not, or choose not to meet the ‘gold-plated’ requirements could opt to be admitted to ‘unlisted markets’. Additionally, overseas companies seeking a UK listing would need to comply with the same LRs as UK companies or seek admission to an unlisted market. Indices could use admission to the Official List as one of their inclusion criteria and develop other indices for unlisted markets where appropriate, although they would be under no obligation to do so.
• Model 3 – Similar to the current listing structure, this option proposes two broad segments for UK listed commercial companies where a “senior” segment would be aimed at companies with an established track record and contain additional requirements on shareholder protection and governance – but would also benefit from certain enhancements such as  alternative track record requirements for companies in different sectors. An “alternative” segment would be created for growth and acquisitive companies. Trading venues would be able to continue to use the segments as admission criteria without setting their own in isolation. As is currently the case, indices could also choose to continue to use admission to the "senior" segment as one of their inclusion criteria.
• Model 4 – Similar to Model 3,  “senior” and “alternative” segments would be created for the UK listed companies but the market, rather than the FCA, would be allowed to set the minimum standards (such as determining what is an appropriate free float for a particular issuer) for the alternative segment.

Other enhancements

The FCA is also considering removing the duplicative process of admitting securities to both the Official List and to a trading venue. The FCA considers that the two processes conducted in parallel have no benefit in the current regulatory structure and, instead, notes that it would  consider admitting a class of securities, rather than individual securities to the Official List. Subject to consultation, this means that issuers would not need to apply to the FCA for admission of further issues to the Official List.

Additionally, the FCA is keen to hear views on whether the process for listing debt and debt like securities could be improved and whether they should be listed on a separate segment.

Proposed changes to the listing regime

The FCA proposes a package of measures targeted to remove some perceived barriers of entry for certain issuers seeking a listing in the UK.

Dual class share structures – now welcome to the premium listing segment

Targeting founder-led growth companies, the FCA has proposed a time-limited dual class share structure (“DCSS”) which would be permitted within the premium listing segment. Holders of unlisted weighted voting rights shares would be permitted to vote on matters relevant to premium-listed shareholders for up to five years from the date the shares were admitted to premium listing, provided that the DCSS meets the following conditions:

• the voting rights are limited to a maximum weighted voting ratio of 20:1;
• the unlisted weighted voting rights shares may only be held by directors of the company (or beneficiaries of that director’s estate);
• the weighted voted rights are only to be available in two limited circumstances: (i) a vote on the removal of the holder as a director at any time and (ii) following a change of control, on any matter (in order to operate as a strong deterrent to a takeover); and
• there must be a mechanism for the end of the five year exemption period (for example, the conversion to ordinary premium listed shares upon transfer to anyone other than a beneficiary of the director’s estate).

Consequently, the FCA is proposing to amend LR 9.2.21R so that holders of specified weighted voting rights shares would no longer be precluded on voting on matters relevant to a premium listing. These matters include approving class 1 and related party transactions; voting on transactions such as rights offers and open offers and approving the cancellation of listing or transfer of listing to the standard segment.

Note that for these matters, holders with specified weighted voting rights will be able to participate in these votes but on a ‘one share, one vote’ basis. The additional weight of the voting rights will not apply to such matters other than following a change in control (as noted above) in order to deter any potential takeover within the first five years of the premium listing.

An increase to the minimum market capitalisation

For new listings only, the expected aggregate market value of all securities to be listed (excluding treasury shares and shares of a close-ended investment funds or open-ended investment companies) is proposed to be raised from its current level of £700,000 to at least £50 million for shares. This would not apply as a continuing obligation for currently listed companies.

10% free float

A new 10% free float requirement for premium and standard listings is proposed (reduced from 25%) both at listing and as a continuing obligation. No flexibility on this limit is offered  - as the FCA has confirmed that it will not accept a free float lower than 10% at listing application or as compliance with the respective continuing obligation.

Additionally, the FCA is seeking views on whether an annual (or more frequent) disclosure requirement of an issuers’ free float may be more useful to investors.

Track record – further changes for certain companies?

The FCA acknowledges that the current premium listing requirement for historical financial information to cover at least 75% of an issuer’s business for the last 3 years can be unduly burdensome for some issuers – but not enough issuers are impacted to justify the costs of any changes to the current requirements at this stage. Instead, the FCA will consider publishing further guidance on whether it might consider waivers to the existing rules. Additionally, the FCA is seeking feedback on the types of innovative companies which might struggle to meet these requirements, following which it will seek views and evidence from stakeholders on possible proxies for the track record for such companies.

Other minor changes

The FCA is also consulting on a range of minor changes in the FCA rulebook to update for technological changes, clarify drafting and remove duplications.

Next steps

Following the publication of HM Treasury’s consultation on the review of the prospectus regime, and the FCA’s recent consultation on SPACs, this consultation is another significant component of the Government’s package of measures which strives to make the UK’s capital markets an attractive destination for ambitious companies and investors following the UK’s departure from the EU.

The consultation closes on 14 September 2021 and, subject to consultation feedback, the FCA will seek to make relevant rules by late 2021. On the wider discussion on the future structure of the UK’s listing regime, the FCA will provide feedback and, if appropriate, issue a potential further consultation on the wider listing regime changes in due course.

If you would like to discuss any of the proposed reforms, please do contact your usual contact at Hogan Lovells or one of the listed contacts.