Listing Rules Reform - Corporate Governance Newsflash
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LISTING RULES REFORM

Following on from our May newsletter regarding the Listing rules reform, the Financial Conduct Authority (FCA) has announced that the new UK Listing regime will come into force on Monday 29 July 2024, at which point the current Listing Rules sourcebook will cease to have effect and will be replaced by the new UK Listing Rules (UKLR) sourcebook.

The new UKLR has been published and a two-week implementation period will end on Monday 29 July when the UKLR will come into effect, subject to some transitional provisions. The new rules are largely in line with the draft rules consulted on previously by the FCA but some changes (flagged where relevant below) have been made in response to feedback from the consultation. 

SUMMARY OF KEY CHANGES

Categories

• The premium and standard segments will be replaced by the equity shares (commercial companies) category (ESCC).
• Companies currently in the standard segment are expected to be mapped to the equity shares (transition) category.
• A separate category for equity shares of closed-ended investment funds (CEIF) has been carried forward to the new UKLR.

General

• There will be one set of Listing Principles and guidance for all categories, which emphasise the role of directors and the need for controls regarding compliance with the UKLR. However, following feedback, the new UKLR makes it clear that a declaration that a company has appropriate systems and controls to ensure compliance with the listing rules is only required on IPO.
• FTSE Russell has indicated that ESCC and CEIF issuers will be eligible for the FTSE UK Index Series and does not anticipate any ‘day one’ changes to the current composition of its indices.

Key changes under the ESCC continuing obligations: 

• No shareholder approval will be required for Class 1 transactions (25%+ on class tests), but detailed disclosures must be made to the market. Following concerns expressed during the consultation, the FCA has provided further flexibility around the timing of these disclosures. Certain key information must be announced as soon as possible upon agreement of the terms of a Class 1 transaction and, if certain other required disclosures are not available at that time, a second, follow-up announcement should be made as soon as possible thereafter and no later than completion of the transaction. Companies’ disclosure obligations under the UK Market Abuse Regulations are unchanged.
• No shareholder approval will be required for large, related party transactions and the threshold for a substantial shareholder under related party transactions will be increased from 10% to 20%. The related party transactions disclosure regime under DTR 7.3 will not apply to ESCC companies.
• The requirement for a written relationship agreement with a shareholder holding 30% or more of the voting rights has been removed. However, it will be necessary to demonstrate through disclosures that the company is able to carry on its main business activity independently from its controlling shareholder at all times. Notwithstanding this, some companies might wish to continue with a form of relationship agreement.
• All ESCC companies must adopt the UK Corporate Governance Code and follow it on a comply or explain basis.

Boards should be mindful that not all institutional investors are in favour of the changes to the rules, as outlined in an open letter from the International Corporate Governance Network.  

Key changes under the CEIF category 

• Significant transaction and related party rules in the CEIF category have been generally aligned with the ESCC, although some additional rules have been retained or included to deal with investment trusts’ particular features.
• Changes to the investment manager’s fee and other remuneration require a sponsor fair and reasonable opinion, if any percentage ratio under the class tests is equal to or greater than 0.25%. Where it is above 5%, prior shareholder approval and an FCA-approved circular, along with a sponsor fair and reasonable opinion will be required.
• The UKLR clarifies that a director appointed to the board of more than one listed fund with the same AIFM will be considered independent, so long as the AIFM is independent of the fund’s investment manager.
• Under the new regime where a new class is issued by a CEIF that is intended to convert into an existing class of shares (“C shares”), depending on the voting rights attached to the C shares they will be listed in one of two categories. If the C shares carry voting rights prior to conversion they will be listed in the CEIFs category, if the C shares do not carry voting rights prior to conversion, they will be listed in the new “non-equity and non-voting equity shares” category.

The AIC has stated that the new rule adds momentum to the drive to make the UK’s capital markets more competitive and support the competitiveness of investment companies themselves.

Key changes for standard listed companies 

Standard listed companies will have until 29 January 2025 to ensure appropriate mechanisms are in place to adhere to the Listing Principles.

• Existing standard-listed companies will not be forced to de-list if they are not willing or ready to transfer to the ESCC category.
• There is no set end date at present for the transition category and no deadline for issuers to transfer out of it. Instead, the FCA will keep the category under review and publicly consult before its removal, providing sufficient time for any remaining issuers to consider their options.
• Companies that choose to transition to the ESCC category will face significantly increased obligations, such as the revised controlling shareholder regime and significant transaction rules. They will be able to take advantage of a streamlined transfer process if their shares have been admitted to the Official List for at least 18 months continuously without significant change to their business.
• The category will be closed to new applicants and any company in the transition category undertaking a reverse takeover will have to transfer to another listing category to retain a UK listing.

NEXT STEPS

Company Matters are here to support your Company through this transition. Over the next two weeks, your client contact will be reviewing your corporate governance / regulatory materials ensuring these reflect the new UKLR.

If you have any queries, please do not hesitate to reach out to your Company Matters contact.