27 June 2018 by Peter Swabey and Henry Ker
The FCA’s decision to lower listing requirements for sovereign-controlled companies risks undermining the UK’s esteemed financial markets
On 8 June, the Financial Conduct Authority (FCA) published the rules for a new category within the UK premium listing regime ‘to cater for companies controlled by a shareholder that is a sovereign country.’
The FCA first mooted this idea in a consultation published in July of last year. The original intention was to draw an appropriate balance between retaining the high standards of the premium listing regime and relaxing it where necessary to encourage sovereign-controlled companies to go beyond the basic obligations of standard listing.
The elephant lurking in the room with all of this is, of course, Saudi Aramco. The Saudi Arabian state oil company is considering selling a 5% stake, valued at £75 billion, with London attempting to attract the listing ahead of rivals such as New York and Hong Kong. However, Andrew Bailey, chief executive of the FCA, was keen to stress this was not the reasoning behind the changes.
The new category will become available from 1 July 2018 and will require compliance with all the normal premium listing rules with two exceptions, one on controlling shareholders and one on related party transactions.
The first exemption concerns controlling shareholders. In normal circumstances, a company with a controlling shareholder would be expected to have its controller commit to a written and legally binding agreement to undertake any transaction with the company on commercial terms and on an arm’s length basis, and not to do anything, including by shareholder resolution, which prevents the company from complying with its listing obligations. Under the new rules, a sovereign state that is a controlling shareholder will not be required to enter into such an agreement with the company.
“The UK has a reputation for the quality and integrity of its financial markets, regulation and standards of corporate governance”
The FCA explains that sovereign states find it difficult to commit to shareholder agreements for practical reasons, as ‘most states are not set up in a way that one signatory can bind all facets of the state. ‘In particular, the entity holding or controlling stakes in the listed company may have limited ability to influence other parts of the state. As a result, sovereigns have found it difficult to provide the undertakings required under the rules for controlling shareholders, which are typically individuals or corporates.’
Furthermore, the FCA argues that ‘the wider information available regarding the relationship between the sovereign and the company support (sic) investor understanding of the relationship’.
Secondly, companies listing in this segment will not be required to obtain a sponsor ‘fair and reasonable’ opinion or shareholder approval for related party transactions with the sovereign state before any such transaction is completed. The FCA argues that ‘the number of transactions makes this a disproportionately onerous requirement’ for some sovereign-controlled companies.
Following feedback to the consultation, this rule has evolved since the original proposition from last July and, as published, goes some way towards addressing ICSA’s original concerns: ‘One of the most important aspects of our market integrity is that of investor protection – notably around minority shareholder rights and the ability of minority investors to hold to the fire the feet of a majority investor seeking to take advantage of his, her or its position to advance their interests rather than those of investors as a whole.
Key to these protections are the related party rules and the controlling shareholder rules and it is exactly those rules which it is proposed to disapply. It is our view that the circumstances of sovereign-controlled companies are exactly those in which these rules are potentially most likely to be needed.’
While ICSA would have preferred ‘sovereign-controlled companies be subject to the same rules as any other company’, the concessions made in response to consultation feedback are important ones. The requirement for disclosure of a related party transaction on agreement gives investors the key piece of information on which they can base investment decisions, albeit that it does not give them the right of approval.
The second concession on the original proposals concerned the requirement for the election of independent directors to be put to a separate vote of independent shareholders. Originally, the FCA advocated dropping this requirement, but following the consultation has opted to retain it.
“The requirement is an important opportunity for independent shareholders to have their say”
This is crucial as the requirement is an important opportunity for independent shareholders to have their say. Having said that, the provision does not always give independent investors much power – as we saw with the reappointment of the chairman of Sports Direct, Keith Hellawell, in 2017. In this case, although 54% of independent shareholders voted against his re-election at their annual general meeting in September 2016. He was elected at a subsequent meeting in January 2017, held after a 90-day ‘cooling off period’, when majority shareholder Mike Ashley was able to use his 55% shareholding to push the vote through.
It is fair to say that even as revised, the changes were not unanimously welcomed. As is ever the way with such changes, there were those who claimed, loudly, they go too far. There were also, no doubt, those who felt the FCA had not gone far enough.
The Institute of Directors was ‘deeply disappointed the FCA has decided to press ahead with the creation of a new premium listing category which reduces key corporate governance requirements. This decision has been made despite opposition from across the governance spectrum and without providing evidence as to the necessity for the reduction in standards.’
Andrew Bailey referred to the opposition in his evidence to the Treasury Select Committee on 13 June, when he was critical of much of the ‘knee jerk’ reaction to the final proposal, which he defended on the basis ‘we think it is a sensible thing to do’.
When announcing the new rules, Bailey said: ‘These rules mean when a sovereign-controlled company lists here, investors can benefit from the protections offered by a premium listing. This raises standards. This package recognises that the previous regime did not always work for these companies or their investors. These rules encourage more companies to adopt the UK’s high governance standards.’
“We dilute standards at our peril and must think carefully about the implications of making changes”
The FCA view is: ‘Without the modifications, these companies would likely default to the standard segment of the UK list, or list in other jurisdictions which do not have the additional protections investors wish to see in place. In our view, that would not benefit investors or issuers.’
Alongside this, some have voiced concerns as to whether the new category will even have the desired effect. ICSA policy advisor Chris Hodge likened it to ‘the High Growth Segment … The listing category that the London Stock Exchange launched to great fanfare in 2013 as a way of getting expanding technology companies from all over Europe to list in London rather than the US.
‘Five years on, the High Growth Segment consists of a grand total of one company (stand up and take a bow, Matomy Media Group!).’ Hodge added, ‘[even though the rules] are not being watered down quite as much as they might have been, they are still being diluted. And the justification – that state-controlled companies are different from other companies with a controlling shareholder – is not all that persuasive. Different does not necessarily mean better governed.’
The UK has, rightly, a worldwide reputation for the quality and integrity of our financial markets, our regulation and our standards of corporate governance. The latter, in particular, are widely seen to be world leading. These standards and the integrity of the UK market are both a competitive advantage and a powerful point of differentiation in favour of our growth and competitiveness. We dilute them at our peril and must think carefully about the implications of making changes.