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Listing Review Recommendations

Keeping the UK's markets on top

Listing Review Recommendations

Overview

The recommendations of Lord Hill's UK Listing Review were published yesterday, 3 March. The review, which was launched in November 2020, considers the efficiency, attractiveness, and competitiveness of the post-Brexit UK Listing Regime.

The recommendations aim to further increase the attractiveness of the London markets as a leading venue for listing, especially in the technology sector, and for companies, particularly Special Purpose Acquisition Companies ("SPACs"), which may otherwise be drawn to markets in North America and Europe.

The recommendations, directed to the FCA and the Treasury, include the following.

Revising the requirement for SPACs to be suspended on announcement of an acquisition

The report recognises the need to open up the UK markets as a viable listing venue for SPACs, obstacles to which are currently the requirement for suspension upon announcement of an acquisition and the difficulties in publishing meaningful, forward-looking financial information (see Facilitating the provision of forward-looking information below). The report recommends the removal of the presumption of suspension, at least for SPACs above a certain size, and suggests that the FCA considers rules and guidance with regard to requirements for disclosure, shareholder approval and redemption rights for shareholders in relation to a proposed acquisition. We have heard credible rumours that the FCA is being pushed to do this in a matter of weeks, not months.

Facilitating the provision of forward-looking information

The report notes the frustration of investors with the lack of forward-looking financial information at the time of IPO, and the inefficiencies inherent in the need to rely on analysts' research. It recommends that the provision of such information could be facilitated by adjusting the rules on issuer's and directors' liability for forward-looking information to include, for example, new due diligence defences.

Allowing companies with dual class share structures to list in the premium listing segment

At present, "dual class" share structures, which enable founder directors to maintain special share interests, can only list on the standard listing segment: see for example The Hut Group and S4 Capital (both listings in which Travers Smith were involved). Under the proposals, "dual class" share structures would be allowed to list on the premium listing segment, with the aim of permitting founder directors to maintain controlling interests for a limited period after going public. However, in order to maintain corporate governance standards, the proposal is limited to the issue of a class of shares with weighted voting rights preventing removal of the founder director(s) and change of control for 5 years only. The shares would be subject to transfer restrictions. Weighting of voting rights would be limited to 20:1 and therefore, in practice, a 3.75% shareholding would be necessary in order to prevent a takeover.

Re-branding the standard listing segment as "Main Segment"

The report acknowledges that the standard listing segment is "suffering from an identity and branding crisis". The proposals recommend that it is relaunched as a market for companies of all types to list in London. It is also acknowledged that the lack of index-inclusion is a factor which makes standard listing less attractive, and suggests that the link between premium listing and index-inclusion should be broken.

Lowering the free-float requirement

The report recommends lowering the free-float percentage from 25% to 15% and allowing more choice for companies of different sizes to use measures of liquidity other than an absolute free float percentage. This would allow the increased flexibility available in other regimes without, it is argued, damaging liquidity or minority protection.

The threshold above which investment managers and other institutional shareholders are excluded from contributing towards the free float calculation could be raised from 5% to 10% and allow individual fund managers in one institution to be treated separately.

Re-designing the prospectus regime

The recommendations include a fundamental review of the prospectus regime, taking advantage of the opportunity to diverge from the Prospectus Regulation post-Brexit. The rationale is that the documentation required on a capital-raising transaction should be appropriate to the particular transaction and should serve the interests of investors by highlighting the information which they actually require.

The report recommends: 

  • changing prospectus requirements so that, in future, admission to a regulated market and offers to the public are treated separately;

  • changing how the prospectus exemption thresholds function so that documentation is only required where it is appropriate for the type of transaction being undertaken and suits the circumstances of capital issuance; and

  • use of alternative listing documentation where appropriate and possible, e.g. in the event of further issuance by an existing listed issuer on a regulated market.

It also considers the possibility of accepting foreign issuers' home prospectuses.

Maintaining the three-year track record requirement for premium listing, but expanding concessionary routes for high-growth sectors

While the call for evidence did not generally support removal of the three-year track record requirement, the report recommends that the concessionary route currently available for scientific research-based companies should be broadened to include other high growth innovative companies from other sectors which are also able to show that they are sufficiently mature in ways other than through having positive revenue earnings.

Simplifying the rules on historical financial information required for a listing prospectus

Companies which have grown by acquisition would no longer be required to provide historical financial information covering 75% of a company's business for three years. This requirement, generally accepted to be a "blunt instrument" which can require excessive time and cost to comply with, would be reduced under the proposals to the last financial year and prior year comparatives.

Empowering retail investors

The report notes that retail investors should be encouraged to participate in equity capital markets so as to "foster a stronger equity culture in the UK". The recommendations include considering how technology can be used to facilitate retail investor engagement and also the re-establishment of the "Rights Issue Review Group" to refresh the process of addressing inefficiencies in pre-emptive issues.

Reviewing the IPO rules on unconnected analyst access

The recommendations include a review of the (relatively recently introduced) rules requiring research analysts who are connected to an IPO to withhold publication of their research for seven days following announcement of the expectation of intention to float and the publication of the issuer’s registration document, if unconnected analysts have not been briefed alongside the connected analysts during the private phase of the IPO. Market participants consider that these rules have increased time, cost and execution risk on IPOs, without materially increasing the availability of unconnected research.

Other proposals

The report proposes that the Chancellor should present an annual report to Parliament on the State of the City, setting out the steps that have been taken or are to be taken to promote the attractiveness of the UK as a global financial centre.

The report sets out some wider themes for consideration by the Treasury with regard to the wider "financial ecosystem" including industry concerns in relation to:

  • better deployment of pension fund assets;

  • creating a competitive tax environment; and

  • the detrimental impact of MiFID II on the provision of research on SMEs.

Next steps

The recommendations amount to a potentially significant shake-up of the equity capital markets regime and will require extensive consultation and changes to the law and the FCA Rules. The FCA aims to publish a consultation paper by the summer with a view to making relevant rules by late 2021.

Lord Hill's letter to the Chancellor noted that the recommendations are "the beginning of a conversation, not the end" and that the input of the whole marketplace would be needed to achieve the changes which are required.  We will work with our clients and fellow practitioners to ensure that the needs of our clients are represented.

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