Following the UK’s departure from the EU on 31 January 2020 the UK-EU Withdrawal Act (EUWA) provided for a transition period (which ended on 31st December 2020) during which the UK’s listing regime remained unchanged. From 1st January 2021 the EUWA repealed the European Communities Act 1972 - so ending the supremacy of EU law – while at the same time preserving the existing UK laws which implemented applicable EU law into UK law. Consequently, the current UK listing regime continues to be derived from EU law.
The UK government in looking for areas to diverge from the EU and flex its new-found freedom identified the UK listing rules (LRs) and prospectus regime as areas for review and reform. In November 2020 the government called for a review (the Review) of the UK listing regime – chaired by Lord Hill – to identify ways in which it could be made more attractive to issuers and investors without compromising London’s high standards of governance and market integrity.
Report
HM Treasury published the Review’s report (the Report) in early March 2021. The Report’s recommendations expressed the need to close a gap between London and other global centres rather than open one. In particular:
between 2015 and 2020 London accounted for only 5% of global IPOs
the number of listed companies in the UK has fallen by about 40% from a 2008 high
the most significant companies currently listed in London are more representative of finance and the "old economy" than companies of the future
The Review received over 60 submissions and took in conversations with market participants. Those submissions indicated:
regulatory requirements on business and the liability profile of companies and their directors have increased significantly over time
the listing regime has become over-complex with duplication, overly long timescales and burdensome requirements.
The government is examining the Report's recommendations.
Key Proposals
The Report’s key proposals included:
Dual-Listing
Multiple share classes are not permitted on the LSE’s premium segment. Such structures are often used to allow founders to retain enhanced voting rights after a listing and the current prohibition is perceived as a barrier to attracting founder-led technology companies to a UK listing.
In recommending that this prohibition be lifted the Report proposes a series of limitations on the scope of any dual class regime:
weighted voting shares should only be held by the directors and with limited exceptions should convert into ordinary shares on transfer
weighted voting rights should be restricted to ensuring that the shareholders remain as directors and can block unwelcome takeover bids
the rights should be limited to 5 years’ duration
These changes are a response to the desire to encourage companies to list in London at an earlier stage of their growth cycle.
Free-float
The free-float requirements of the LRs were identified by the Report as a potential barrier. These rules are designed to ensure sufficient post-IPO liquidity and specify a minimum amount of a company’s shares to be in public hands as opposed to the company’s directors, employees or majority shareholders.
The free-float requirement raises a number of issues:
It affects pre-IPO shareholders who are reluctant to sell a large proportion of their shareholding and miss post-IPO growth
The requirement for shareholders and issuers to sell or issue more shares on IPO can also lead to a focus on achieving the highest possible IPO price which can complicate investor negotiations and adversely impact post-IPO performance
It is a deterrent for private equity backed and high growth companies.
The Report recommends:
reducing the free-float requirement from 25% to 15% for both market segments
allowing companies of different sizes alternative measures to demonstrate sufficient liquidity e.g.:
smaller companies having the ability to engage an FCA authorised broker to help with finding matching business
larger companies being permitted to demonstrate a minimum number of shareholders, publicly held shares, share price and/ or market value.
These alternative liquidity measures mean that the free-float requirements will be more suitable to an issuer’s stage of evolution whilst at the same time ensuring that the shares in issue and number of shareholders meet the liquidity criteria.
Special Purpose Acquisition Companies
The LRs presume that a suspension by the FCA of trading in a SPAC’s shares will be necessary when a SPAC announces an acquisition or a proposed acquisition becomes public. This presumption is based on the assumption that when a SPAC (i.e. a cash shell issuer whose purpose is to undertake an acquisition) announces a proposed transaction, there will be insufficient publicly available information about the proposed deal and the SPAC will be unable to assess accurately its financial position and inform the market accordingly. Where the FCA is satisfied that there is sufficient publicly available information a suspension will not be required.
A suspension of trading means that SPAC investors could be locked-in for an uncertain period.
The Report proposes substituting this presumption with rules concerning the information about the target which must be disclosed by a SPAC at the announcement of a proposed deal and the implementation of measures for the protection of SPAC investors (e.g. to vote on a SPC acquisition or to redeem their investments prior to completion).
Prospectus regime
The Report recommended a fundamental review of the existing regime so that it is reflective of both the maturity and scope of the UK’s capital markets and the evolution in the types of issuers coming to or already on the market.
These recommendations include:
differentiating between offers to the public and admission of shares to a regulated market
changing the prospectus thresholds so that documentation is only required where it is appropriate for the type of transaction being undertaken and the needs of the issuer’s investors
dispensing with the need for a prospectus in certain circumstances or the use of an abbreviated format (e.g. issues by listed or quoted companies)
Standard listing segment
The Report recommended improving the appeal and profile of the standard segment – often viewed as a poor substitute for a premium listing – as well as encouraging investor groups to develop guidelines enabling standard listed companies to be eligible for inclusion in leading FTSE indices.
Closing Thoughts
The Report’s recommendations will help the government’s post-Brexit drive to ensure that London remains competitive in capital markets and financial services. It will be some time before any changes are implemented but the regulatory and political environment provide optimism that the LSE’s markets will see an increase in activity and start to close the 'gap' with competitor markets.
