Changes To The Listing Rules In Relation To The Sponsor Regime - Corporate Governance

Introduction

In January this year the Financial Services Authority (FSA) published consultation paper CP 12/2 (CP 12/2) detailing proposed changes to the Listing Rules (LRs). The FSA stated that its intention behind the changes was to ensure that the rules are updated in line with existing and emerging market practices and to codify the material produced by the FSA.

This article focuses on the impending changes to the LRs in relation to the sponsor regime as outlined in consultation paper CP 12/25 (CP 12/25), which contains the final wording for the changes to the sponsor provisions of the LRs and discusses the feedback received in relation to CP 12/2. The proposed changes to the LRs include, in particular, clarification of the situations when a sponsor must be appointed, duties of sponsors and companies and record keeping obligations, with such changes to the sponsor regime due to take effect on 31 December 2012.

For an outline of the proposed changes to the LRs in relation to controlling shareholder and majority interest in business (CP 12/25) and the changes to the LRs, Prospectus Rules and Disclosure and Transparency Rules (Handbook Notice 123) please refer to the articles contained elsewhere in this PLC update.

Sponsor regime

The FSA's objective is that the sponsor regime be in place to minimise significant potential risks to the integrity of the premium equity market by:

ensuring an understanding of the regulatory framework imposed on premium listed companies undertaking transactions and applicants seeking a premium listing under part 6 of the Financial Services and Markets Act 2000; and
enabling the UKLA to receive assurances from an expert in the listing regime that such companies and applicants are complying with this regulatory framework.

The sponsor regime was last reviewed by the FSA in 2008 and it is hoped that the coming changes more accurately reflect the scope and nature of sponsor services, update the regulatory regime with current market practice and formalise the rules and obligations with which sponsors have to comply as well as assisting sponsors and clients in the balancing of their duties to the UKLA with their commercial interests.

The key changes are detailed below but full details can be found in CP 12/25 available on the FSA website (www.fsa.gov.uk).

Key changes

Scope of sponsor service (LR 8.2.1)

The remit of sponsor services has been extended so that a sponsor will be required to be appointed for services provided to premium listed issuers.

A sponsor will be regarded as providing a 'sponsor service' when there is a requirement for a sponsor to provide a key confirmation or assurance to the FSA, including for example, 'eligibility letters' and 'severe financial difficulty letters'. LR 8.2.1R(8) is amended to state that a new applicant must appoint a sponsor to submit a letter of eligibility to the FSA detailing how the applicant satisfies the eligibility criteria of the LRs. This is not a new requirement but a clarification of the current regime.

All communications between a sponsor and the FSA in connection with a sponsor service will now be included by the expanded definition of a 'sponsor service'. So for example, a sponsor should ensure that engagement letters and sponsor agreements are in place before making any communication to the FSA.

The FSA has also noted that sponsors' engagement letters and sponsor agreements should expressly acknowledge that the sponsors have regulatory duties to the FSA under the LRs which cannot be overridden.

Related party transactions and reverse takeovers (LR 8.2.1R)

Amendments to LR 8.2.1R will require a premium listed company to appoint a sponsor for the purpose of providing the FSA with confirmation that the terms of proposed smaller related party transactions (i.e. those not requiring shareholder approval), and the terms of any transaction described within a Related Party Circular, are 'fair and reasonable' from the shareholders' perspective.

The FSA noted in particular in CP12/2 that the amendment to LR 8.2.1R(7) requires sponsors to be appointed by issuers for the purpose of submitting LR13 Circulars and the sponsor appointment will solely be required for the fair and reasonable confirmation to be included in the Circular. It is appreciated that sponsors may seek expert advice to enable them to provide such confirmation.

Premium listed companies will also be required to appoint a sponsor to liaise with the FSA in relation to whether a suspension of a listing is appropriate prior to a reverse takeover being announced and for the purpose of confirming the issuer's declarations to the FSA where a target of a reverse takeover is not subject to a public disclosure regime.

Roles and responsibilities of sponsors (LR 8.3.1)

The amendments to LR 8.3.1 extend its requirements so that sponsors are obliged to provide the FSA with any explanation or confirmation the FSA may reasonably require to ensure that the LRs are being complied with by an applicant or listed company. The FSA regards this amendment as merely a formalisation of current market practice.

Sponsors are to take all reasonable steps to ensure that sponsor communications to the FSA are accurate and complete in all material respects to the best of their knowledge and belief. The FSA will consider whether a sponsor has used its own judgment, knowledge and expertise to review and challenge information it has provided to the FSA following reliance upon / provision of information from a third party.

A specific principle has also been introduced requiring sponsors to act with honesty and integrity in relation to a sponsor service.

Conflicts of interest (LR 8.3.7 and LR 8.7.12)

The FSA has clarified that a sponsor will be required to take all reasonable steps to identify conflicts of interest that could adversely affect the sponsor's ability to carry out its obligations under LR 8 as part of its ongoing conflict checking procedures (LR 8.3.7). Whilst sponsors may find it useful to maintain conflicts declarations for their own internal purposes, any such process should not detract from the ongoing nature of its obligation to the FSA.

Under the amended LRs sponsors will no longer be required to submit Conflict Declarations at specific points during a transaction (LR 8.7.12). The FSA emphasises that its overarching principle is for sponsors to identify and manage conflicts of interest throughout the provision of a sponsor service on an ongoing basis (i.e. there is a continuing obligation of identification and management of conflicts). Sponsors have responsibility for monitoring regulatory conflicts (i.e. between their obligations to the FSA and the commercial requests of their clients) as well as client conflicts.

Responsibilities of issuers (LR 8.5.6R)

Changes to LR 8.5.6 will place a specific obligation on premium listed companies and applicants to cooperate with their sponsor to ensure they are able to discharge their obligations to the FSA. The issuer will be required to cooperate with its sponsor by providing all information reasonably requested by the sponsor for the purpose of carrying out the sponsor service.

Document retention (LR 8.6.16AR)

Sponsors will be required to retain accessible information and records sufficient to demonstrate the basis on which its sponsor service has been provided. The guidance to the rule provides this means such records as would enable a person with a general knowledge of the sponsor regime, but not necessarily with any specific knowledge of the actual sponsor service being provided, to understand the basis on which material judgments have been made throughout the provision of the sponsor service (LR 8.6.16CG).

Sponsor notifications (LR 8.7.8 and LR 8.7.21AG)

Changes to the notification requirements in LR 8.7.8 will ensure that sponsors are required to notify the FSA in a number of new specific situations. For example, notification of any information that a sponsor reasonably believes could adversely affect market confidence in the sponsor regime.

The FSA has amended LR 8.7.21AG to clarify when a sponsor should submit a sponsor cancellation request and states that the list of situations provided in this LR is a nonexhaustive list of examples. Furthermore, if a sponsor submits a notification to the FSA and there are to be no ongoing discussions with the FSA (i.e. whereby the sponsor will not remain eligible) the sponsor must submit a sponsor cancellation request.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

UK: Changes To The Listing Rules In Relation To The Sponsor Regime