10 April 2017 by Lorraine Young
The FCA is consulting on proposed changes to the listing regime
The Financial Conduct Authority recently issued a discussion paper (DP) and a consultation paper (CP) on proposed changes to the listing regime. DP17/2 Review of the Effectiveness of Primary Markets: the UK Primary Markets Landscape explores the current structure of the listing framework and whether it remains fit for purpose.
CP17/4 Review of the Effectiveness of Primary Markets: Enhancements to the Listing Regime considers technical enhancements which could be made quite quickly and which could enable primary markets to function better.
The DP includes stakeholder feedback on key issues which informed the proposals under consideration. However, some areas were endorsed by stakeholders and there are no proposals to alter them. The issues explored in the DP are:
Chapter 2 of the DP explains the structure and context of the listing regime in the UK, the difference between regulated and exchange regulated markets, and what the premium and standard listing segments cover. It gives a clear and useful overview of the regime for those unfamiliar with it.
The DP seeks suggestions on the way forward for the standard listing segment. Premium listing is well understood, but standard listing less so.
“Standard listings may be useful for a temporary step-down from a premium listing”
Currently about two-thirds of standard listings are for ‘second lines’ and funds. Second-line securities may be issued by companies with a premium listing for their ordinary shares, which might use a standard listing for another class, for example, preference shares, and also securities issued by closed-ended funds.
Standard listings may be useful for a temporary step-down from a premium listing; for companies with less ‘normal’ voting structures unsuitable for a premium listing; or for overseas issuers wanting a dual listing.
The disadvantages of a standard listing include the lack of inclusion of standard listed shares in indices and the lack of clarity and knowledge about the segment – for example, why it might be chosen over an AIM listing.
One suggestion is that open-ended investment companies could move to a standard listing (which they are currently prohibited from doing) to reflect the fact that they are regulated in other ways. Closed-ended investment funds would remain part of the premium listing segment.
Overseas issuers can choose the most appropriate route when they list in the UK. This may be by a premium listing, a standard listing of equity shares, or a standard listing of global depositary receipts.
The DP considers the introduction of an ‘international segment’ for large, mature and successful overseas companies which may not be able to obtain a premium listing due to a government or founding family stake where control is retained. A package of investor protections could be developed for such a segment and views are sought on what these might be.
These companies often need capital to scale up, and ‘patient’ capital (investment based on long-term considerations). The DP considers how different forms of primary market structure and regulation might support this.
“Snap, the owner of the Snapchat app, caused controversy for issuing shares with no voting rights to new investors”
When Snap, the owner of the Snapchat app, listed in the US, it caused controversy for issuing shares with no voting rights to new investors. Many large investors were outraged – especially those forced to hold the shares for index tracking purposes.
Google and Facebook had previously created different share classes, which concentrated control with their founders, but this was clearly a step further. In the UK, companies with dual-class share structures are only permitted to have a standard listing, as UK investors perceive they do not promote high-quality corporate governance and minority shareholder protection.
Those who support such structures say it allows individuals running the company to focus on its long-term development, without the pressure of responding to short-term market demands. Although the lack of accountability could certainly raise concerns, the difficulties for companies in finding long-term, supportive investors is also an issue – so you could have some sympathy with a dual-share class structure. It remains to be seen whether issuing shares with no votes at all is a step too far.
The DP asks questions around science and technology companies attracting capital for growth and whether it is appropriate for this to be done within a private or public company context. It also considers the need for long-term engagement between companies and investors and how this interacts with the current regulatory focus on the dissemination of inside information which can promote short-termism.
The CP issued with the DP covers several areas where the FCA considers more immediate changes could be made to improve effectiveness. These include:
As well as redrafting parts of this chapter to provide greater clarity, there will be new technical notes and additional guidance.
These are the alternative ways for a company to list without a three-year revenue-earning track record. A new route is proposed for certain property companies where a property valuation report might be considered a better way to judge the maturity of the company in this context.
No changes are considered necessary to the other concessionary routes, however some changes to technical notes are proposed to improve understanding.
These are covered in LR10 which sets out various disclosure requirements when an issuer is undertaking a major transaction. The disclosures or approvals required depend on the size (or ‘class’) of the deal (unclassified, class 2, class 1 or an RTO).
There are four tests to determine which class the transaction falls into. It appears that one of these tests – the profits test – can often produce anomalous results. Two changes are therefore proposed:
“RTOs are large transactions where the business, company or assets being acquired are larger than the issuer acquiring them”
That premium-listed companies may disregard an anomalous profits test result of 25% or more when all of the other class test results are below 5%
That premium listed issuers may, in limited circumstances, make specified adjustments to the profit figures used in the profits test without first seeking FCA approval.
These changes would apply for transactions which would otherwise be class 1 or RTO and where the issuer has obtained the required guidance from a sponsor on the classification. Guidance in the relevant technical note will be updated.
These are large transactions where the business, company or assets being acquired are larger than the issuer acquiring them – based on the outcome of the class tests. Alternately, they are where the transaction results in a fundamental change in the business, the board or the voting control.
When an RTO is being contemplated, the FCA has often determined that the listing of the acquiring company should be suspended until sufficient information is publicly available about the target company to ensure the market is properly informed – or the deal falls through.
Investors do not favour this because there can be uncertainty about the length of the suspension and issuers may therefore decide not to pursue an RTO.
The proposal in the CP is that in future, the assumption will be that sufficient information does exist under the normal market disclosure requirements and there will not be a suspension of the acquiring company’s shares.
However, this change in approach would not be adopted for ‘shell’ companies, that is, companies holding mainly cash or short-dated securities, or whose main objective is to undertake an acquisition or merger.
The cancellation of listing on completion of an RTO will not change and therefore the newly created entity will need to apply for a new listing, as now.