Hill Dickinson considers some of the key questions for issuers on the Standard List arising from the FCA’s latest guidance on proposed changes to the UK Listing Rules

In this Article, we have attempted to answer some of the burning questions arising from the publication of the FCA’s report setting out proposed changes to the UK Listing Rules on 20 December 2023. These questions are focused on the impact of the proposed changes to companies currently listed or considering a listing on the existing Standard Segment of the Main Market.

Background

Since 2008, there has been a steep decline in the number of companies seeking to list on the Main Market of the London Stock Exchange and policy makers have been grappling with the difficult question of how to reinvigorate and modernise UK public markets. In March 2021, the UK Listing Review made several key recommendations on how the UK listing regime could be improved. The UK Listing Review noted that Premium Segment standards are regarded as ‘overly burdensome’ and a deterrent for companies listing in the UK, while the Standard Segment (whilst offering much greater flexibility), remains poorly perceived by companies and investors.

Following the UK Listing Review, the FCA published its first consultation paper on proposed changes to the Listing Rules in May 2023 (CP23/10), which set out several significant proposed changes to the UK Listing Rules (UKLR). On 20 December 2023, the FCA published a long-awaited paper on the progress of the consultation (CP23/31) (the Report), including, an initial draft text of part of the UKLR. The Report confirms that the FCA will proceed with its plan to establish a simplified listing regime with a single listing category.  

Questions

1. What is the status of the consultation and when is the new UKLR regime expected to come into effect?
     
   The Report provides significant detail on the proposed UKLR regime, including an initial draft of certain sections of the UKLR. The consultation on LR8 (proposals regarding sponsor competence) and the replacement of the Listing Rule source books remains open until 16 February 2024 and 22 March 2024, respectively. Further updates, including the final sections of the revised Listing Rule sourcebook, are expected in Q1 2024. 

   The FCA intends to publish a Policy Statement and the final UKLR at the start of the second half of 2024, and there is expected to be a 2-week implementation period before the new UKLR comes into effect. We anticipate that these timescales remain subject to the feedback received and the level of consultation needed to publish the final set of rules. 
    

2. Is it correct that the current Standard and Premium Segments will cease to exist?
     
   Yes. The FCA has confirmed that the key proposed reform is to create a single category for UK listings of equity shares in commercial companies, which will be termed the ‘commercial companies category’ (ESCC). It is intended that commercial companies on the ESCC will be governed by a single set of rules.
    
3. What will happen to current Premium and Standard Segment issuers on Day One of the new UKLR Regime?
     
   The FCA is proposing that commercial companies on the Premium Segment will be automatically ‘mapped’ to the new ESCC once the new UK Listing Regime goes live, while commercial companies on the Standard Segment will be ‘mapped’ into a new ‘transition’ category. There is a further possibility that certain issuers on the Standard Segment will move into a new cash shell category (explained below) based upon an FCA analysis.
    
4. What rules will apply to Standard List issuers mapped to the transitional category? Will there be a big difference from the current regime?
     
   The FCA has indicated that the transitional category is intended to replicate the continuing obligations currently applicable to companies on the Standard Segment. This category will be closed to new issuers. The FCA have been mindful to ensure that Standard List issuers do not have a ‘cliff edge’ under the new proposals. The FCA has indicated detailed drafting for this category will be set out in the second tranche of the draft UKLR instrument later in Q1 2024. 
    
5. How long will the transitional category continue to exist after the implementation date?
     
   The transitional category has no fixed end date. However, it is reasonable to assume that the number of issuers in this category will dwindle over time as a result of, issuers moving to the ESCC, de-listing or seeking to acquire a listing on alternative market (ie AIM or Aquis). The FCA have indicated that they will undertake a further consultation if they consider removing this category in the medium term and in the event of closing this category, the FCA will provide sufficient time for any remaining issuers to consider their options.
    
6. Can commercial companies in the transitional category transfer to the ESCC category?
     
   Yes. The FCA has indicated that the transition category is intended to help maintain the status quo for commercial companies on the Standard Segment in terms of their continuing obligations until they are ready to adapt and move to the ESCC. A sponsor must be appointed for the purposes of dealing with any transfer process to the ESCC. The FCA have proposed a ‘modified transfer process’ to encourage issuers within the transition category that are eligible to utilise the modified transfer process to move to the ESCC. 
    
7. What are some of the features of the modified transfer process to the ESCC?
     
   Legacy standard list issuers in the transition category will be able to utilise a modified transfer process provided they can demonstrate that they have complied with the LR and the UKLR (respectively). Applicants must satisfy the following criteria: (i) the issuer must have had their shares admitted to the Official List for at least 18-months on a continuous basis (including the publication of at least one annual financial report following admission); (ii) not have any securities (whether or not the subject of the proposed transfer) currently or in the last 18 months, suspended from listing; or (iii) not be undergoing or recently undergoing (ie in the last 18 months) a significant change to their business (ie a ‘reverse’).  
     
   The modified process will involve an assessment of the issuers ability to comply with all ESCC eligibility requirements that are additional to the existing requirements under LR 14, namely, controlling shareholder rules (LR 6.5), constitutional arrangements (LR 6.9) and externally management company requirement (LR 6.13). The issuers sponsor will also need to be satisfied that it has satisfactory procedures in place to comply with its obligations and a sponsor’s declaration is required. The issuer would, notably, be subject to the UK Corporate Governance Code.  
    
8. Can an issuer in the transitional category complete a ‘reverse takeover’ and return to the transition category?
     
   No. The FCA has confirmed in the Report that an issuer in the transition category would need to cancel their listing and make an application to list on an open category, such as the ESCC, and would need to satisfy the eligibility requirements at that stage (including, the appointment of a sponsor). At this stage, it is reasonable to assume that certain issuers may at that point seek to admit their securities onto an alternative market or de-list, if they do not believe that they can comply with the requirements of the ESCC.
    
9. Are there any important changes to the eligibility criteria for commercial companies seeking to IPO on the ESCC compared to the existing Premium Segment?
     
   In the Report, the FCA has confirmed the following important changes in terms of the eligibility criteria for commercial companies seeking to join the ESCC (compared to the Premium Segment):
    
   1. issuers will not need to: (i) demonstrate three-year revenue track record currently required under LR6.3; (ii) satisfy working capital requirements required under LR6.7; and (iii) satisfy the requirements for historical financial information under LR6.2 (covering a period of three financial years). New issuers will, nevertheless, be required to publish a prospectus requiring a working capital statement and historical financial information (as required by the Prospectus Regulation Rules). The Report reflects that the FCA will still have the power to scrutinise the prospectus of a new issuer and sponsors should consider if an issuer has a reasonable basis for making the working capital statement.  
         
   2. the current LR6.8.1R imposes an eligibility restriction on Premium Segment applicants that the total of all issued warrants to subscribe for equity shares or options to subscribe for equity shares must not exceed 20% of the issued equity share capital (excluding treasury shares) of the applicant as at the time of issue of the warrants or option. This excludes employee share schemes (LR6.8.2R). This restriction has been abolished for the new ESCC.
        
   3. The FCA has confirmed that it will retain the restriction under LR6.13 for the new ESCC against externally managed companies. This rule requires applicants to satisfy the FCA that the discretion of its board to make strategic decisions has not been limited or transferred to a person outside the applicant’s group, and that the board has the capability to act on key strategic matters in the absence of a recommendation from a person outside the applicant’s group.
       
10. Do the proposals impact the 10% free float (shares in public hands) eligibility requirement and the eligibility requirements for premium listed companies concerning pre-emption rights (LR 6.9.2R)?
        
    The FCA has confirmed in the Report that it proposes to carry over the 10% free-float threshold to the ESCC and the obligation on pre-emption rights will be retained. 
      
11. What will happen to existing cash shells (SPACs) on Day One of the new UK Listing Rules regime?
      
    The FCA has indicated that SPACs will be put into a separate category, which it intends to name the ‘shell companies category’. This category is intended for shell companies actively pursuing a strategy of acquisition or whose assets consist solely or predominantly of cash or short dated securities. This could be a SPAC that has listed for this specific purpose, or a listed company that becomes a shell company following divestment of assets. The existing definitions for cash shells will be retained.
     
12. Will the continuing obligations for cash shell companies on the shell companies category differ from the current regime?
     
    The FCA has indicated that the continuing obligations for SPACs on this category will closely resemble LR14.3, except where they do not currently apply to shell companies. Please refer to our response to question 16 for important changes to the eligibility requirements applicable to SPACs.
     
13. What is the position for companies that have made a submission to the FCA for an eligibility review, but admission is expected to occur after the new rules apply?
     
    The FCA has established a new definition of ‘in-flight applications’ which will apply to applicants where: ‘a complete submission to the FCA for an eligibility review by an applicant for admission of securities received by 4:00 pm on the date the Policy Statement is published, where admission to listing is expected to be after the commencement date’. If an application is made after this date, they will not be treated as ‘in flight’ and would be based on new eligibility criteria.  
     
    The FCA has proposed that in-flight applications would be treated, at the point the UKLR comes into force, as being an application for the corresponding new UKLR listing category. For in-flight applications to the Standard Segment category, the intention is to maintain, for these applicants, the status quo regarding the eligibility requirements they are assessed against (ie moving to the transitional category). The intention is to avoid such applicants potentially delaying their IPO. They will also have the option to revise their application for a different category if they wish, such as, applying to the ESCC category. 
     
14. Will ‘in-flight’ applications need to be completed by a certain date?
     
    Yes. The FCA is proposing that applications to the Standard Segment and shell categories will have a period of 1 year to complete their admission process from the date of implementation of the UKLR.  After that date, the application will lapse. The proposed 1-year period will also lapse if there is a ‘material change’ to the applicant’s business within that transitional period
     
15. Will there be any changes to the eligibility criteria for new SPACs?  
     
    The FCA has indicated that the eligibility requirements for shell companies will remain similar to LR14.2, but additional eligibility criteria will be added. This will include: (i) the constitution will need to impose a requirement that an ‘initial transaction’ is completed within 24 months from the date of admission (otherwise, it will need to wind itself up), with the ability to extend this timeline by 12 months (with shareholder approval) and then a further 6 months (without shareholder approval where certain conditions are met); and (ii) funds raised must be appropriately ring-fenced and held with an independent third party so that they are preserved to complete an acquisition or return those amounts to investors (less any amounts specifically agreed to be used for a shell company’s or SPAC’s running costs and disclosed in the prospectus relating to admission). Further revisions to the handbook will follow in Q1 2024.  
     
16. What is the situation for SPACs that are mapped to the cash shell regime who have yet to complete an acquisition or are unable to meet the additional eligibility requirements?
     
    The FCA has confirmed that there will be transitional provisions that will apply to ‘cash shells’ (including, existing issuers and ‘in-flight’ applicants). It is proposed that SPACs will have a transitional period of 3-years to allow time for SPACs or other shells companies to either complete their operations or make the necessary changes to comply with the proposed additional eligibility requirements, for example, amending its constitution as outlined, above. The FCA will not, however, require cash shells mapped to this category to comply with the obligation to ring-fence funds (as outlined above in question 15) as it would be unfair to impose this retrospectively.  
     
    The 3-year transitional period starts from the date the UKLR comes into force. Therefore, for in-flight applicants admitted to the new category at a point in time post-implementation of the UKLR (which must occur within one year of the UKLR implementation date), the transitional period would be less than 3-years.
     
    If at the end of the 3-year transitional period, the issuer has not met the proposed requirements, then the issuer would be required to contact the FCA to request a cancellation of its listing.
     
17. Will the Sponsor regime apply to SPACs?
     
    Yes. The FCA has confirmed that they propose to extend the benefits of the sponsor regime to companies on the cash shell category. They have identified a number of instances where a sponsor will need to be appointed, including where, an application is made for admission, when it is proposing to enter into an initial transaction, when the shareholder approval is being sought for an initial transaction (requiring a circular), where an application for re-admission is made (following an initial acquisition) or where an application is made to transfer from another category to the cash shell category.
     
18. What rules will apply to SPACs when they undertake a reverse takeover (initial transaction)? 
     
    The FCA has proposed that there is a new standalone definition of ‘initial transaction’ for issuers in this category (which is broadly the same as the existing definition for a reverse). The FCA has stated that the concept of ‘transaction’ in this context is broad and is likely to include any transaction of an acquisitive nature (including, the issuance of a loan, a purchase of a minority stake or the entering into of a joint venture arrangement). Set out below is a non-exhaustive list of some of the requirements that will be imposed on SPACs when concluding an acquisition:
     
    1. a notification which should include the same information as proposed for a significant transaction announcement for the ESCC category (ie a Class 1 style announcement under the existing regime).
        
    2. shareholder approval will be required before the initial transaction is entered into (with founding shareholders, the SPAC sponsor and directors being excluded from the vote).
        
    3. sponsor to be appointed and shareholders sent an FCA approved circular.
        
    4. the content of that circular to have the same content requirements as a circular for a reverse takeover.
        
    5. board approval for the initial transaction before it is entered into.
            
       On completion of an initial transaction, the shell company will be obliged to contact the FCA and apply for the cancellation of their listing (on the cash shell category) and, where relevant, seek re-admission of the enlarged group to a different category.
        
19. Will there be a new segment for overseas companies that have a ‘primary’ listing on a non-UK market but are also currently listed on the Standard Segment?
     
    Yes. The FCA is proposing a specific secondary listings category for the equity shares of non-UK incorporated companies with a secondary listing in the UK. The FCA proposes to map current ‘secondary’ Standard Segment issuers into this new category upon implementation of the UKLR. Mapped issuers of secondary listed shares could apply to transfer to the ESCC at any stage after implementation, potentially using the modified transfer process. Unlike the transition category, the FCA proposes to make the secondary listing category open to new applicants. Eligibility and continuing obligations for the secondary listing category would largely replicate LR14, subject to targeted additional requirements which reflect the intended scope of the category as being for ‘genuine’ secondary listings only. The FCA does not propose to apply the sponsor regime to this category. 

Other Changes

In addition to the matters outlined in the answers to the questions (above) the FCA has confirmed its position on matters that will be of particular interest to issuers on the Premium Segment (who will be automatically mapped to the ESCC category):

• Class 1 transactions (Significant Transactions) will not be subject to a shareholder vote nor will it be mandatory to include a Circular.  
   
• No shareholder vote will apply to related party transactions. Sponsor will be required to provide a fair and reasonable opinion for related party transactions, above 5%, and will be required to make a market announcement.
   
• Class 2 announcements are abolished.
   
• Post-IPO Sponsors are generally expected to perform a more targeted role.