London Landing: Reform of UK capital markets

The FCA's new listing rules took effect on 29 July 2024. This followed detailed proposals in the FCA's consultation paper: Primary Markets Effectiveness Review: Detailed Proposals ("CP23") which was published in December 2023. The  entirely new "UK Listing Rules" ("UKLR") Sourcebook represents a complete overhaul of the current UK listing regime and includes wide-ranging changes for both sponsors and listed companies.

Key features of the new regime

• Single segment for commercial companies with equity share listing

The previous two-tier listing regime, comprising of premium and standard listing segments, has been replaced by the new single category of UK listings of equity shares in commercial companies ("ESCC").  For premium-listed companies, this listing category represents a relaxation of the rules under which they currently operate, but it is a step up in regime for those currently standard-listed.

The main changes (as compared to a premium listing) include the following:

• No 3 year track record or clean working capital requirements
  
  In line with its general approach of moving towards a more disclosure-based regime, the FCA has removed its long-standing requirements for a three-year track record, historical financial statements and a "clean" or unqualified working capital statement. The FCA expects that disclosure in relation to financial information will continue to be required in the prospectus, including specific provisions for issuers with complex financial histories and requirements for working capital statements.
  
  
• Removal of prior shareholder approval for significant transactions

The prior shareholder vote and circular which were required for premium-listed companies to enter into class 1 transactions have been removed, again in favour of a disclosure-based regime. This removal is an important change, making it easier for listed companies to engage in competitive M&A. The FCA has introduced a disclosure framework requiring information at the current "class 1" threshold (25%) which mirrors much of the current class 1 circular content (for example, a statement that the transaction is, in the board's opinion, in the best interests of the shareholders; risk factors; material contracts; no significant change and the effect of the transaction on the group's earnings and assets and liabilities – but no requirement for a working capital statement or a sponsor declaration), save in the case of an acquisition by the listed company where no historical financial information on the target is required. Target financial information or, if not available, an explanation of how the price was agreed, is required for a disposal but not for an acquisition. The announcement also needs to contain an additional statement that the board considers the consideration to be fair. There is now a two-stage process for announcements where there is a conditional contract, with the first announcement to be released as soon as possible after the terms of a significant transaction are agreed, and the second (more detailed) announcement to be released once the prescribed information has become available and, in any event, by no later than the completion of the transaction. Once the transaction has completed, a further announcement is required.

A class 1 transaction (i.e. one where the percentage ratio is 25% or more in any of the class tests) has been renamed a "significant transaction", and the profits test has been removed from the class tests.

The FCA has provided new guidance on how "ordinary course of business" activities will not be caught by the significant transaction requirements – this includes regular trading activities; commercial arrangements; purchases a company has undertaken as part of the existing business or within the industry sector; capital expenditure to support and maintain the existing business and its infrastructure; and capital expenditure to add scale or in line with the company's business strategy.

A sponsor is not required for a significant transaction but issuers must appoint a sponsor if seeking FCA guidance/rulings on significant transactions and may still seek sponsor guidance in a non-sponsor service capacity.

It is important to note that a shareholder vote is still required for a reverse takeover and there is no "ordinary course" carveout in this regard.

• No class 2 notification
  
  An announcement is longer required under the Listing Rules for what is currently a class 2 transaction and this class of transaction no longer exists; however, companies will of course still have to consider what they need to announce in order to comply with their obligations under MAR. 
  
  
• Less onerous regime for related party transactions
  
  Under the new rules, there is no requirement for a shareholder vote to approve a related party transaction ("RPT"). Going forward, the requirements for a company entering into an RPT meeting the 5% threshold on class tests are:
  
  
  • board approval of the transaction; and
    
    
  • announcement of the transaction, which contains a statement by the board that the transaction is "fair and reasonable" and that it has obtained written confirmation from a sponsor that the transaction is "fair and reasonable". 

The FCA has increased the threshold at which a substantial shareholder becomes a related party from 10% to 20%.

For RPTs under the 5% threshold, the requirements for an announcement and a "fair and reasonable" opinion have been removed.

• Controlling shareholders

In a change from the original proposals, the FCA has removed the requirement for a controlling shareholder agreement. However, it has retained a requirement for independence from any controlling shareholder and included amended guidance on factors indicating non-independence. The rules include a new mechanism for directors to give an opinion on a shareholder resolution put forward by a controlling shareholder when the director considers that the resolution is intended or appears to be intended to circumvent the proper application of the listing rules.

• More flexible approach to dual class share structures (DCSS)

The FCA has introduced a more permissive approach to dual class share structures, with the following features:

• • Most notably, there is no longer a time-related sunset requirement to limit the exercisability of enhanced voting rights (except in the case of institutional investors – see below), although the FCA expects that the negotiation process at IPO may still often result in time-based sunset clauses. 
    
    
  • Enhanced voting rights shares can be issued not only to directors but also to other limited categories of "natural persons" and institutional investors. For institutional investors, there is a 10 year sunset period.  
    
    
  • There is no limit on the maximum enhanced voting ratio. 
    
    
  • There is a much wider list of situations where enhanced voting rights can be exercised – please see the FCA's table illustrating the use of enhanced voting rights shares in ESCC. 

• Changes to the sponsor regime
  
  The role on IPO is largely unchanged, although sponsors no longer have to assess whether an applicant meets the historical financial information, three-year financial track record or clean working capital statement requirements (as these eligibility requirements have been removed – please see above). Post-IPO the sponsor's role is more targeted – sponsors are required for:
  
  
  • significant further issues
    
    
  • related party transactions: fair and reasonable opinions; and
    
    
  • reverse takeovers.

Beyond this, a sponsor is not required for significant transactions, although the FCA notes that issuers can still look to sponsors for guidance in a non-sponsor service capacity. Sponsors are required for companies moving between the categories of listing.

Changes have already been made to the rules on sponsor competence in order to reflect impact of low levels of market activity and are unsurprising given the reshaping of the sponsor role. The three-year time frame for submitting a sponsor declaration to the FCA has been extended to five years and there is now the ability to demonstrate competence through experience gained from providing certain corporate finance advisory services.

• SPACS and shell companies
  
  Key changes include the following:
  
  
  • There is a new listing category for SPACs and shell companies: the "shell companies" category – this is based on the old Listing Rule 14 (but with some modifications) and limited to shell companies actively pursuing a strategy of acquisition or whose assets consist solely or predominantly of cash or short-dated securities.
    
    
  • Requirement for sponsor – the sponsor regime has been introduced to this category: as SPACs and shells are currently standard listed, they do not require a sponsor under the existing regime.
    
    
  • The initial transaction completed by such a company requires board approval but the proposed requirement for shareholder approval was dropped.
    
    
• Other listing categories
  
  There is a new "secondary listing" category for non-UK companies with a primary listing overseas. For further details of all the new listing categories, please see here.

• Changes to Listing Principles

There is now one set of Listing Principles. The previous Premium Listing Principles have been extended to all listed companies and a couple of them (the Principles stating that (i) all shares in a class must carry an equal number of votes and (ii) the voting rights of each class should be proportionate to the relevant interests of that class) have been reframed as rules. There is now additional guidance to support the Listing Principles, including in relation to the importance of the role of directors.

• New board confirmation

The FCA has somewhat controversially added a new element to the listing regime: a board declaration on IPO. As part of the application process, a company's board would be required to provide confirmation that the company has appropriate systems and controls and the company's record-keeping arrangements enable it to comply with any requests from the FCA in order to comply with its ongoing obligations under the Listing Rules and the Listing Principles. 

• Companies in financial difficulties

The FCA's softened position means that reconstructions and refinancing transactions no longer require a shareholder circular and working capital statement. The FCA acknowledges that the requirements are not needed given the existing requirements of company and insolvency legislation as well as MAR obligations. 

What has been retained?

Some elements of the current premium listing regime have been retained, albeit they appear in different places of the new UKLR Sourcebook.

• Market capitalisation and free float requirements – The requirements for a minimum market capitalisation of £30m and a "free float" requirement of at least 10% of the company's issued share capital, which have applied to both premium and standard listed companies, have been retained.
  
  
• Rules on pre-emption rights and buybacks – The existing Listing Rules that control the discount at which further shares can be offered when they are not issued on a pre-emptive basis have been extended to all listed companies. The rules relating to share buy-backs have also been retained, although a sponsor is no longer required for a buyback circular.
  
  
• Shareholder approval for cancellation of listing and reverse takeovers – The rules protecting shareholders from the cancellation of a listing in the absence of a takeover offer or approval by 75% of shareholders remain.
  
  
• UK Corporate Governance Code – The Listing Rules relating to the Code have been retained and extended to all commercial companies.

Mapping arrangements

Premium listed companies have been "mapped" over to the ESCC. Standard listed companies have been mapped to a new "transition category", which is closed to new applicants. Therefore, if the company were to enter into a reverse takeover and needed to list again, it could not do so in this category. There is currently no end date for this category but the FCA will keep it under review and may seek to wind it down in the medium term if it is considered no longer necessary.

In January 2024 the Treasury published the  The Public Offers and Admissions to Trading Regulations 2024 (the "POATRs") which establish the framework for the new UK prospectus regime and give the FCA greater discretion to make rules in this area.  The provisions containing the FCA's power to make rules and issue guidance in relation to the new regime are now in force; however the substantive elements of the POATRs will come into force after the FCA has finalised its rules. In July 2024, the FCA published a consultation on its draft prospectus rules. The consultation has closed and the FCA hopes to  finalise its rules by the end of H1 2025, with a further (as yet unspecified) period before the rules come into force. As with the listing regime, the new prospectus framework represents a significant change to the current regime and there will be an entirely new prospectus sourcebook – the Prospectus Rules: Admission to Trading on a Regulated Market sourcebook (to be known as "PRM").

The key features of the new regime are set out below.

• Admission to trading – The FCA rules will largely replicate the existing regime for prospectuses on admission to a regulated market, although there are some modifications and relaxations, as described below.
  
  
  • The key change in relation to the exemptions for admissions to trading is that, for companies that already have securities admitted to the LSE's main market, the threshold for triggering a prospectus will be raised from the current 20% to 75% of the company's issued share capital, thereby providing significantly more flexibility for companies carrying out further fundraisings. This change, combined with the fact that a prospectus will no longer be required for an offer to the public, means that companies could potentially carry out large fundraisings on an undocumented basis. 
  • The content of prospectuses will be largely the same, although more climate-related disclosures will be required in the prospectus where the issuer has identified climate-related risk factors, or climate-related opportunities that are material to its prospects.
  • The FCA will reduce prescribed content requirements for the summary, allowing cross- referencing and incorporation by reference into the prospectus, and will increase the mandatory page limit from seven to ten pages.
  • The minimum period during which a prospectus must be publicly available will be shortened from six to three working days.
    
    
• Offer to the public – Going forward there will be a general prohibition on public offers of securities and all public offers would be unlawful unless they fall into one of the specified exemptions, some of which are substantially the same as the existing ones. Exemptions will include, amongst others:
  
  
  • the current 150 person exemption;
  • the current "qualified investor" exemption;
  • the current exemption allowing an offer of securities whose denomination per unit amounts to at least £50,000;
  • the current exemption for offers to existing or former employees or directors;
  • the current exemption for offers in connection with takeovers – the FCA is consulting on how it can make this exemption more effective;
  • a new exemption for offers with a threshold of £5m or below (replacing the current €8m threshold);
  • a new exemption for offerings of securities which are, or will be, admitted to a UK regulated market or primary multilateral trading facility;
  • a new exemption for offerings of securities to existing shareholders, subject to certain conditions including that the offer is made pro-rata to a person's existing holding – this is significant as it means that pre-emptive offers meeting the required conditions would not trigger a prospectus; and
  • a new exemption for offers made by means of a "regulated platform", which is an electronic offer platform, with the FCA being able to determine detailed requirements to which such platforms would be subject, including the levels of due diligence and disclosure required on offers made through such platforms. The FCA published a consultation on the new public offer platform ("POP") regime. A POP will allow companies to offer (outside of the public markets) securities to the public where the total value of the offer is more than £5 million over a 12-month period.
    
    
• Liability for a prospectus – In a change to the current position, and in an attempt to attract more retail investors, the new rules will introduce a different standard of liability for a new category of "protected forward-looking statements" which will include statements of opinion or intent, projections and estimates. Such statements will be subject to a recklessness/dishonesty liability standard, with the burden of proof on investors (as opposed to the existing negligence liability standard and reverse burden of proof that may deter issuers from including forward-looking statements in their prospectuses).  In other respects, the key elements of the liability regime will remain in place, for example the obligation to pay compensation to investors for loss suffered due to untrue or misleading statements in the prospectus; rights of investors in relation to a misleading prospectus such as a claim for a negligent misstatement.
  
  
• AIM companies - For AIM and other multilateral trading facilities (MTFs) where there is retail participation, there will be a new concept of an "MTF admission prospectus".  This will be required for all AIM IPOs and reverse takeovers. Going forward, an MTF admission prospectus will be the only type of admission document for all new admissions to trading to AIM, even when there is no fundraising. The POATRs give the FCA power to make rules requiring MTF operators to include in their rules a requirement for publication of MTF admission prospectus as a condition of admission to trading. We therefore expect the LSE to amend the AIM Rules for Companies to provide for this.  Similarly, the LSE has discretion to include rules on whether to include a requirement to publish an MTF admission prospectus. It should be noted that MAR continues to apply and will ensure ongoing disclosure of material information to investors ahead of any further issues, irrespective of the operators' rules (or lack thereof) on specific disclosure documents.

The outcome of the UK Secondary Capital Raising Review (the "Review") was published in July 2022 (please see our client note for further details). Some of the recommended changes have since been implemented, whilst others are still in progress and others still will take more time to be actioned. A summary of the key changes is set out below.

Already actioned: Pre-emption Rights and inclusion of retail shareholders

In November 2022, the Pre-emption Group published a new Statement of Principles and template resolutions (please see our client note for further details). As before, these apply to Main Market companies although AIM companies are also encouraged to comply.  The key changes include:

• An increased general disapplication threshold - The revised Principles increase the limit of the general authority that can be sought for non-pre-emptive issues to a maximum of (i) 10% of issued ordinary share capital for disapplications for any purpose; and (ii) an additional 10% of issued ordinary share capital for acquisitions or specified capital investments announced contemporaneously with the issue or in the last 12 months (increased from six months). The revised thresholds reintroduce, on permanent basis, the temporary flexibility granted to companies during the COVID pandemic;
  
  
• Consideration of retail investors - In order to give due consideration to whether retail investors (and existing investors who are not allocated shares) should be able to take part in the placing, there is a new concept of a "follow-on offer", which can be a further 2% in relation to each limb on the basis that it is:
  
  
  • limited to 20% of the number of shares issued in the placing using the 10% general disapplication;
  • capped at a £30,000 purchase per ultimate beneficial owner;
  • at an issue price which is equal to or less than the offer in the placing; and
  • announced at the same time as, or as soon as reasonably practicable after, the announcement of the placing.

• Concept of "capital hungry companies" (i.e. companies that need to raise larger amounts of capital more frequently) – Such companies will be granted more flexibility in terms of the duration and thresholds of the disapplication of pre-emption rights. The new concept aims to attract high-growth companies in sectors such as tech and life sciences.
  
  
• Reporting requirements – A post-transaction report must be announced via a regulatory information service, as well as being submitted to the Pre-Emption Group for inclusion in its Pre-Emption Database. This information should also be included in the company's annual report following the issue.
  
  
• Curtailment of status of cashbox structures – A cashbox structure should be regarded as an issue of equity securities for cash and is therefore subject to the disapplication limits. 

Already actioned: Expanding scope of rights issue authority to open offers

In February 2023, the Investment Association published a revised version of its Share Capital Management Guidelines (last updated in 2016). Whilst the Investment Association still regards as routine an authority to allot up to two-thirds of a company's existing issued share capital, it extends, as recommended by the Review, the application of the second one-third to all fully pre-emptive offers, not just rights issues as was previously the case. However, companies are expected to explain why they have chosen their capital raising structure and why it is appropriate for the company and its shareholders.

Still to come: Reducing regulatory involvement and cost

Some of the remaining recommendations within this section will take more time, as many are dependent on (i) legislative changes and (ii) the outcome of the other changes taking place in relation to the prospectus regime, as described in this note. Examples of such changes are:

• raising the dilution threshold for a prospectus - The FCA has confirmed in its draft prospectus rules that it will raise the threshold for triggering a prospectus in relation to admitting further securities from the current 20% (of existing fungible securities) to 75%. As is the case currently, the percentage will be calculated over a 12-month period.  This significant increase, which goes well beyond the EU position, will offer companies much more flexibility when carrying out secondary fundraisings; and
• changes to the FCA's approach to working capital  - the FCA will  retain the current requirement to include a working capital statement in a prospectus but is consulting on possible modifications to this;
• shortening the rights issue timetable (both the minimum period for rights issue and the minimum notice period for general meeting).

Still to come: Increasing range of fundraising options

Increasing the range of options is also more of a long-term goal. Options being looked at include:

• the concept of a cleansing notice; and
• a set of standard form terms and conditions with institutional investors.