UK Listings Review | What do you need to know?
Published on 24th Mar 2021
Wide sweeping reforms have been proposed by the UK Listings Review, chaired by Lord Jonathan Hill, as part of a plan to strengthen the UK’s position as a leading global financial centre.
These recommendations were endorsed by the UK Chancellor in his budget speech at the beginning of March 2021 when he promised that a consultation by the UK regulator, the Financial Conduct Authority (FCA), to implement the proposals would follow shortly.
Taken as a whole, the recommendations demonstrate a desire for London to enhance its competitive advantage and attract high growth companies to its flagship exchange. In this Insight we set out the key proposals and what they mean for UK listings.
Dual class share structures in the premium listing segment
Dual class structures are a common feature of listed companies in other jurisdictions, particularly the US, where they are favoured by many founders and management teams as a way to allow them to retain control following a public listing.
In the UK, these structures are only permitted to list on AIM and on the standard segment. For premium listed companies, the principle of "one share, one vote" is enshrined in the Premium Listing Principles.
Changing the rules would make the prestigious premium segment more attractive to founder-led, high growth companies that have gone to other exchanges, notably the NYSE. However, the Hill Review recognises that corporate governance protections are needed where a dual class structure is employed and suggests that these should include:
- a maximum duration of five years;
- a maximum weighted voting ratio of 20:1;
- requiring holder(s) of B class shares to be a director of the company;
- voting matters being limited to ensuring the holder(s) are able to continue as a director and able to block a change of control of the company while the dual class share structure is in force; and
- limitations on transfer of the B class shares.
More flexible free float requirements for all listings
The review highlights that the existing free float rules – rules about shares which are in public hands – are seen as one of the strongest deterrents to companies when they consider where to list, particularly for high growth and private equity backed companies.
The headline recommendation is to lower the absolute requirement for free float for premium and standard listing segments down to 15%. (The level is currently set at 25% although the FCA can waive this down to a minimum of 20% on a case-by-case basis.)
The review also recommends changes to how the free float is calculated – for example, so there is more scope for investment managers and other institutional shareholders to be included in the calculation.
Finally, companies with different market caps should be allowed to use alternative measures of liquidity other than complying with the minimum percentage. Smaller companies should be able to use the same method as that used on AIM. Larger companies should be able to demonstrate that they have a minimum number of shareholders, a minimum number of publicly held shares, a minimum market value of publicly held shares and a minimum share price to support a liquid market (this is the approach taken by the NYSE which does not have a fixed percentage free float requirement).
Encouraging SPAC financing in UK
Special purpose acquisition companies (SPACs) are cash shell companies formed with a view to making an acquisition. Investors buy shares in SPACs in anticipation of the management team making a successful acquisition, based on an investment profile described in its prospectus. The SPAC eventually makes its acquisition in whole or in part using the subscriptions raised from its shareholders. SPACs have become incredibly popular in the USA as an alternative route to financing from public markets. In 2020, 248 SPAC vehicles were listed in the US raising the US$ equivalent of £63.5 billion. By contrast, in the UK, only four SPACs were listed raising a total of £0.03 billion.
The review identifies that the perception that the UK is not a viable location to list a SPAC is causing UK companies, notably fast-growing tech companies, to seek a US, or potentially EU SPAC route for financing.
The review found two key factors why UK SPAC financing has not emerged at scale. Firstly the rule which can require trading in a SPAC to be suspended when it announces an intended acquisition is unattractive to investors who worry that they will be “locked into” their investment for an uncertain period following the identification by the SPAC of an acquisition target. Secondly, the inability of issuers to provide meaningful forward-looking information because of the personal liability that attaches to such statements means that this key category of information is lacking for SPAC investors.
The review seeks to address these factors by recommending:
- That the presumption of suspension of trading when a SPAC announces an acquisition be replaced with rules and guidance similar to how commercial companies are treated. These could cover, for example, the information a SPAC must disclose to the market upon the announcement of a potential acquisition and the right of investors in SPACs to vote on the acquisition or redeem their initial investment prior to its completion
- That the level of liability associated with statements is adjusted to allow directors of companies to publish and stand behind their forward-looking models. This could be achieved, for example, by directors having a defence to liability provided that they could demonstrate that they had exercised due care, skill and diligence in putting the information together and that they honestly believed it to be true at the time at which it was published. The review acknowledges that this change would provide more useful information to all investors, not just those in SPACs.
Re-designing the prospectus regime
The review identified that the drive towards disclosure and transparency coupled with the liability profile attached to prospectuses has led to a ballooning in their size and a reduction in their usefulness.
Rather than tweaking the existing prospectus framework or simply raising exemption thresholds, the review recommends a complete rethink of the prospectus requirements. For example:
- there should be separate rules for admission to a regulated market and offers to the public
- further issuances by companies that are listed or quoted, should either be completely exempt from requiring a prospectus, or be subject to much slimmed down requirements, for example, confirmation of no significant change
- giving consideration to prospectuses drawn up in other jurisdictions being recognised in the UK under a UK prospectus "equivalence" regime
Tailoring information to meet investor needs better
As well as making it easier for companies and directors to make meaningful forward-looking statements, the review identified two other areas where information requirements were not meeting investor needs:
- the three-year track record requirement for the premium listing segment can be onerous for younger and/or acquisitive companies. The review did not recommend removing this requirement but instead proposed extending the current special provisions that apply to scientific research-based companies, which provide a route to listing for companies at an earlier pre-revenue stage, to include more high growth innovative companies.
- the review recommended amending the requirement for historical financial information covering at least 75% of an issuer’s business for premium listings so that this test is only applicable to the most recent financial period within the three-year track record. This simplifies the process for companies that have grown by acquisition.
Retail investors and financial ecosystem
The review also made a number of systemic recommendations:
- that the standard listing segment be re-branded (for example as the "Main Segment") and re-marketed (for instance to encourage investor groups to develop guidelines on areas they see as particularly important to allow for companies on the rebooted segment to be index-eligible)
- that, as part of its work on intermediated securities, the Department for Business, Energy and Industrial Strategy consider how technology can be used to improve retail investor involvement in corporate actions and their undertaking of an appropriate stewardship role
- that HM Treasury re-establish the Rights Issue Review Group to consider how to improve the efficiency of capital raisings by listed companies
- that the FCA review aspects of the recently introduced rules on connected research analysts which has added seven days to the public phase of an IPO process
- that the UK Chancellor present an annual State of the City report to Parliament, with the first report in early 2022
- that HM Treasury review of the statutory objectives of the FCA and extend them to include a duty to take into account the UK's overall attractiveness as a place to do business
Osborne Clarke comment
Taken together, these reforms represent a significant shift for the UK listings regime and will do much to maintain London's competitive position post-Brexit.