The UK is at the heart of the global financial community. Its capital markets are truly international, listing some of the world's largest companies. It is also home to many of the world's leading investment houses and financial institutions and offers an established network of investors and professional advisers. Within the international financial community, the UK is recognised as employing an intelligent approach towards capital market regulation. Combined with its stable political regime and a universally recognised legal system, the UK offers unrivalled opportunities for companies from all over the world.
This is the first of a two-part article addressing the United Kingdom's securities, mergers and acquisitions regimes and it focuses on an overview of the capital markets infrastructure and regulation in the UK.
Capital Markets
London is home to three principal markets – the Main Market of the London Stock Exchange (LSE), the AIM Market of the LSE and the independently operated PLUS Markets. Each of these markets has its own admission criteria. The main differences in admission criteria for each of these markets are set out in Table 1 at the end of this Capital Markets section.
The Main Market of the London Stock Exchange
The Main Market of the London Stock Exchange (LSE) is perhaps the most famous of all of the UK markets, listing some of the world's largest and most well-known companies.
A company seeking to admit its securities to the Main Market must apply to the UK Listing Authority (UKLA), a division of the Financial Services Authority (FSA) in order for its securities to be admitted to the Official List. The UKLA operates as a securities regulator otherwise referred to as the 'competent authority' for the purposes of the Financial Services and Markets Act 2000 (FSMA), the principal legislation governing financial services and markets in the UK. In addition to applying to the UKLA, a company must also apply to the London Stock Exchange for its securities to be admitted to trading on the Main Market.
The LSE is classified as a 'recognised investment exchange'1 in the UK which makes it subject to a duty to ensure that dealings in securities admitted to its markets are conducted in a proper and orderly manner. It is also an EU Regulated Market for listed securities meaning it is subject to the full rigours of the EU directives which form part of the Financial Services Action Plan (FSAP) 2.
Companies seeking to list their shares on the Main Market will need to comply with the following regulation:
- The Listing Rules: a set of rules published by the FSA setting out minimum admission requirements for listed companies and their continuing obligations post admission;
- The Admission and Disclosure Standards: a set of rules published by the LSE, containing the admission requirements and the ongoing disclosure requirements which companies with securities admitted to trading on the markets of the LSE have to observe; and
- Part VI of FSMA: legislative provisions relating to Official Listings.
Companies whose securities are already admitted to the Main Market will be subject to the following regulation:
- The Listing Rules (as described above);
- The Disclosure Rules: a set of rules for issuers relating to the disclosure and control of insider information and transactions by persons discharging managerial responsibilities and persons connected with them;
- The Transparency Rules: a set of rules which relate to major shareholdings and the notification and dissemination of information by issuers; and
- The Prospectus Rules: a set of rules determining the form and content and approval requirements for prospectuses which, save where an exception applies, are required in respect of any offer of transferable securities to the public in the UK or in respect of the admission of transferable securities to trading on a regulated market in the UK.
The Main Market has a two tier listing structure - Premium and Standard. Premium Listed companies (including overseas companies) must comply with a 'premium' or 'super-equivalent' listing standards including the requirement to 'comply or explain' against the UK Corporate Governance Code, described in further detail below. Standard Listed companies need comply only with the less onerous EU minimum listing standards which include a requirement to provide a corporate governance statement together with a description of internal control and risk management systems. Premium and Standard Listings are available to both UK and overseas companies. Until 2009, Standard Listings on the Main Market were available only to overseas issuers.
The Main Market is also divided into a number of specialised segments. techMARK and techMARK mediscience are sub-markets of the LSE which have a market focus on innovative technology and healthcare companies. landMARK is another LSE sub-market dedicated to highlighting the potential of listed companies in every region across the UK and Ireland. landMARK brings together companies of all sizes traded on either the Main Market or the AIM Market of the LSE from within a particular region with the objective of developing closer relationships between a region's quoted companies and investors.
The AIM Market of the London Stock Exchange
The AIM market is the junior market of the LSE. For a number of reasons, including its flexibility and respected regulatory standards, the AIM market is popular with small to medium-sized fast growth or new companies from a wide range of industry sectors and an increasingly wide variety of countries. Its popularity is evidenced by the unprecedented amounts raised, as well as by the number of companies that have joined.
Unlike a Premium Listing on the Main Market, AIM has no suitability criteria and therefore attracts companies from a wide range of industry sectors. The AIM listing criteria also allows for the admission of companies without a trading record. AIM has a simple admission process and a set of rules and guidance notes which are tailored to suit the needs of fast-growth acquisitive companies.
AIM companies are required to retain and maintain at all times a nominated financial and regulatory adviser, commonly referred to as a NOMAD, from the LSE's Register. The NOMAD will co-ordinate extensive due diligence on the company to ensure the company is appropriate for AIM and will assist the company in producing either a prospectus or an AIM admission document. The NOMAD is required to comply with the AIM Rules for Nominated Advisers published by the LSE.
AIM companies are required to comply with the AIM Rules for Companies. Unlike Main Market companies, AIM listed companies are not bound by the Listing Rules or the majority of the Disclosure Rules or the Transparency Rules and because of AIM's 'exchange regulated market' status AIM companies are not bound by the Prospectus Rules save to the extent they offer their securities to the public under the relevant legislation. In addition to the AIM Rules for NOMADs and the AIM Rules for Companies, the LSE also publishes specific industry sector guidelines applicable to mining companies, oil and gas companies and investment companies admitted to AIM.
PLUS Markets
PLUS Markets ('PLUS') is a small and mid-cap stock exchange. It is independently operated by PLUS Markets Plc. PLUS was previously known as OFEX until it was rebranded as PLUS Markets in October 2006. Like the LSE, PLUS is a 'recognised investment exchange'. PLUS provides both primary market services (listings and quotations) and secondary market services (trading). PLUS has two primary markets, namely, the PLUS-listed market and the PLUS-quoted market. PLUS-listed is an EU Regulated Market for listed securities. As with Main Market Listings, Companies seeking admission to PLUS-listed must apply to the UKLA for admission to the Official List and also to PLUS-Markets to join PLUS-listed in accordance with the relevant admission and disclosure standards. PLUS-quoted is an exchange regulated market whose shares are traded on the PLUS platform. The PLUS trading platform offers an execution venue for trading securities listed elsewhere in London and Europe, as well as its own PLUS primary market. Companies seeking admission to PLUS-quoted must do so in accordance with the PLUS Rules for Issuers published by PLUS Markets.
Table 1: Main Differences in Admission Criteria Between the Markets
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Main Market Premium Listing |
Main Market Standard Listing |
AIM |
PLUS-quoted |
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The Financial Services Authority: the UK's financial services regulator
The Financial Services Authority is currently the UK's single regulator for the financial services industry. It is an independent non-governmental body. It has been given a wide range of rule-making, investigatory and enforcement powers in order to meet its statutory objectives, being to maintain market confidence; promote public awareness; protect consumers; maintain financial stability and reduce financial crime. The FSA currently regulates over 29,000 firms that have a diverse range of sizes and activities. The FSA Handbook provides rules and guidance for all authorised firms carrying on business in the UK.
Companies carrying out certain regulated activities in the UK are required to be authorised by the FSA or to fall into one of the exemptions. The different kinds of activities which are regulated include (i) carrying out investment activities, which in itself includes dealing in investments as principal or agent and managing investments; (ii) effecting and carrying out contracts of insurance and (iii) accepting deposits. It should be noted that certain regulated activities may be deemed to be carried on in the UK where the activity is carried on, or managed from an office in the UK, regardless of the jurisdiction of the company.
Following the recent global financial crisis, we have seen the FSA take an increasingly zealous approach to regulation against both corporations (large and small) and the individuals concerned with the management thereof. Recently, the FSA fined JP Morgan Securities a record £33.32m for failing to protect its clients' money by not keeping it in separate accounts to protect client money in the event of insolvency. JP Morgan was fined despite notifying the FSA as soon as it became aware of the position and co-operating with the FSA throughout, and despite the fact that the misconduct was not deliberate and no clients suffered loss. Commentators have expressed surprise that the FSA did not take action against the senior management involved given its recent enthusiasm for fining individual management as well as the firms in which they were employed.
However, despite its recent handing out of record fines, the future of the FSA looks uncertain. Since coming into power in May 2010, the UK's coalition government is considering the possibility of shifting more power for financial regulation from the FSA to the Bank of England through to a total abolition of the regulator. It is not yet clear as to what the future holds for the FSA but at the time of writing commentators are predicting that at the very least it will lose its independent status.
The UK Takeover Regime
Takeovers and mergers on the UK's public markets are governed by the City Code on Takeovers and Mergers (the City Code), a set of rules which since 2007 has had a measure of legal force following the implementation of the EU Takeover Directive. The City Code is enforced by the City Panel on Takeovers and Mergers (the Takeover Panel) which is an independent regulatory body. The City Code regulates transactions involving a change of control of certain public entities (generally, the right to exercise 30% or more of the voting rights of the applicable entity) so as to ensure the fair treatment of shareholders (particularly minority shareholders). The acquisition of 30% or more of such an entity's voting rights, whether by one person or a group of persons acting together to acquire such control, triggers a mandatory offer to minority shareholders. However, the acquisition of additional shares by a shareholder who already owns over 50% of a company's voting rights does not trigger a mandatory offer.
Historically, the majority of takeovers and mergers in London have been implemented by conventional tender offers and the bulk of the City Code is drafted with that in mind. However, the recent predominance of friendly takeovers has led to a substantial number of mergers being effected by means of court-sanctioned schemes of arrangement, to which the City Code also applies, partly due to the lower threshold of acceptance by shareholders holding 75% of the target company's shares voted on the relevant resolutions (excluding shares held by the offeror and concert parties) as opposed to minority squeeze out provisions that apply only on acceptance by shareholders holding more than 90% of the target company's shares (excluding shares held by the offeror and concert parties). Where the target is a UK company, such schemes have the additional benefit of being exempt from stamp duty, a potentially considerable saving of 0.5 % of the total consideration.
Until recently it has been thought that hostile takeovers were not amenable to being implemented by court-sanctioned schemes of arrangement but there are signs that the alternative view is taking hold among practitioners, although we are still not aware of any such scheme actually becoming effective.
The principle of equality of treatment enshrined in the City Code means that poison-pill style defences are almost impossible to construct for companies to which the City Code applies. Indeed the conduct of both offeree and offeror during an offer period is strictly controlled and "frustrating actions" generally require the approval of the Takeover Panel and/or independent shareholders.
The City Code applies to most UK companies quoted on London's markets, as well as certain European companies. It does not however apply to non-EU companies, and in certain circumstances does not apply even to UK companies if their central management and control is exercised outside the UK.
Company Law
UK Company law has been the subject of a wide ranging review in recent years culminating in the implementation of the Companies Act 2006 (the 2006 Act). The 2006 Act was introduced in stages, with the final provisions coming into force on 1 October 2009. To a large extent the 2006 Act is a restatement of the provisions of the Companies Acts 1985 and 1989. The new legislation aims to be more responsive to the needs of business and to create a more comprehensive code of company law. It implements the Government's "think small" approach to company law with its provisions providing a significant amount of de-regulation of private companies. The 2006 Act aims to make it easier to set up and grow a business in the UK and to improve the UK's position as one of the most attractive jurisdictions in which to establish and develop a business.
Corporate Governance
The key source of corporate governance in the UK is the UK Code on Corporate Governance, formerly known as The Combined Code on Corporate Governance (the Code)5. On 28 May 2010, the Financial Reporting Council (FRC), the UK's independent regulator responsible for promoting confidence in corporate governance, introduced changes to the Code following its extensive review of the Code and a consultation process. The review was triggered by the recent global financial crisis. It is hoped that the introduction of the new Code will go some way to rebuilding public confidence in the corporate sector.
The Code applies to all companies with a Premium Listing of equity shares, regardless of whether they are incorporated in the UK or elsewhere. If a listed company ignores the Code, then there are penalties under the Listing Rules. The new version of the Code will apply to financial years beginning on or after 29 June 2010. Companies listed on AIM or PLUS and private limited companies are not strictly bound by the terms of the Code, but as the Code sets out standards of best practice in terms of corporate governance, many companies listed on AIM or PLUS, and some private limited companies, take the decision to adhere to its principles, to the extent that it is now common practice for companies to do so.
Since its introduction in 1992, the Code has provided the principles, rather than the rules, which UK companies are expected to follow. It sets out standards of good practice in relation to issues such as board composition and development; remuneration; accountability and audit; and relations with shareholders. Its purpose is to actively seek best corporate governance. The Code is drafted in general terms to allow companies flexibility in their method of implementation.
The whole emphasis of the Code is that compliance with it should not be a box ticking exercise. As with other jurisdictions, the Code adopts a "comply or explain" approach. The Listing Rules require listed companies to report on how they have applied the Code in their annual report and accounts and to confirm compliance with its principles, or to the extent they have not complied, to explain what else they are doing to promote good corporate governance. The focus is on each company implementing its own procedures to ensure good corporate governance. The Code places a significant emphasis on the role of the board, and in particular, the role of the non-executive director, in ensuring good corporate governance.
The recent changes were introduced to reinforce board quality, focus on risk and accountability to shareholders. Key changes include (i) a new section at the start of the Code setting out the revised main principles which are designed to guide board behaviour; (ii) a clearer statement of board responsibilities relating to risk; (iii) a greater emphasis on maintaining a well balanced board involving a mix of skills, experience and gender; and (iv) a recommendation for all directors of FTSE 350 companies to stand for re-election by the shareholders every year in order to promote diversity in appointments to the board. This annual re-election of directors is likely to rustle a few feathers. The current practice is for one-third of directors to retire at every annual general meeting and for each director to retire once every three years. In 2010, only seven FTSE 100 companies have proposed full board re-election, which highlights the significant change facing many companies.
Market Abuse and Insider Trading
There has been a statutory regime in place for some time in the UK to counter market manipulation and insider dealing. Previously it was a criminal offence to (i) make false or misleading statements relating to investments (misleading statements), or (ii) to act or engage in conduct which creates a false or misleading impression as to price or value (market manipulation), or (iii) to deal in securities whilst in possession of inside information in relation to those securities or to disclose such inside information (other than in the proper conduct of duties) (insider dealing). However, the onerous burden of proof attaching to criminal offences resulted in few prosecutions and even fewer convictions.
Consequently, a new civil market abuse regime was introduced in December 2001 (and amended with effect from July 2005). Market abuse consists primarily of the use of insider information and market manipulation. There are seven types of behaviour which constitute market abuse revolving around the use of insider information and creating a false or misleading impression of the market. The lower standard of proof required for civil proceedings has made it more attractive for the FSA to take action, and indeed, as mentioned previously, we are now seeing the FSA take more vigorous action against market abuse, and achieve a level of success far greater than under the criminal regime. Because it is not a criminal offence, the sanction for market abuse is in the form of an unlimited fine and/or public censure, not imprisonment.
Liability for market abuse is not restricted to companies and individuals regulated by the FSA. Anyone can be liable. Liability can arise even when the abuse was unintentional or committed indirectly, i.e. by encouraging abusive behaviour in another.
However, it should be noted that, notwithstanding the introduction of this civil market abuse regime, insider dealing, market manipulation and making misleading statements continue to be criminal offences in the UK.
Raising Equity Finance
There are many ways in which a company can raise equity finance in the UK, the main methods being by way of public offers or private placement. We shall consider each of these methods in further detail in the next edition of this newsletter.
Conclusion
Despite the international financial crisis, the UK, and particularly London, has maintained its reputation as one of the world's leading financial centres. In addition to the unrivalled capital raising opportunities and access to a wealth of associated advisory services, companies coming to market in the UK will also benefit from the globally recognised prestige that comes with a London listing.
The London office of Fasken Martineau has over 90 years' combined experience in advising public companies listed and seeking a listing on each of these markets. It has an established network of corporate finance advisers specialising in advising companies with both primary and secondary listings in the UK. The London capital markets team acts for a number of companies listed on the Main Market of the London Stock Exchange. It also acts for over 35 AIM listed companies, making it one of the leading AIM law firms in the UK.
Footnotes
1. A recognised investment exchange is an investment exchange recognised by the FSA under FSMA and is authorised to carry out certain controlled functions.
2. The FSAP is a programme of EU legislation which aims to achieve an integrated European financial sector and a fully-integrated securities and risk capital market.
3. Offers to 100 or more natural legal persons (where the offer is greater than 2.5m Euros (cumulative) in any one year) including rights issues and open offers will require companies to produce a full prospectus for approval by the UK Listing Authority.
4. As per comment 3 above.
5. The latest edition of the Code can be found at: http://www.frc.org.uk/documents/pagemanager/frc/combined%20code%20june%202006.pdf. The next review of the Code will be in 2013.
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.
