UK: Proposed Changes To UK Listing Rules

Last Updated: 6 March 2012
Article by Jonathan Angell, Sean Geraghty and Richard O'Brien

The Financial Services Authority ("FSA")1 recently launched a consultation paper proposing a number of amendments to the Listing Rules ("LR").2 The changes proposed by the FSA, the majority of which are technical in nature but which aim to take account of recent developments in market practices, focus on the following areas:

  • Reverse takeovers (LR Chapter 5);
  • Sponsors (LR Chapter 8);
  • Transactions (LR Chapters 10, 11, 12 and 15);
  • Financial information (LR Chapters 6 and 13); and
  • Externally managed companies (LR Chapter 5, DTR 3.1 and PR 5.5.3).

The proposed amendments include an element of consolidation: all relevant material (including Technical Notes,3 some of which require updating) will be incorporated in the formal body of the LR. A number of the amendments also affect the Disclosure and Transparency Rules ("DTR") and the Prospectus Rules ("PR").

Reverse Takeovers (LR Chapter 5)

The proposals clarify the FSA's approach to reverse takeovers and which transactions are caught by the reverse takeover regime. In short, a reverse takeover under the LR is where a listed

issuer acquires a target where a percentage ratio (as calculated under the LR) is 100% or more (so, essentially, where the target is larger than the listed issuer), or which would result in a fundamental change to the business of the issuer. The proposals will consolidate the FSA's approach currently set out in LR 5 and 10 and the related LR Technical Note into a single section of the LR.

The concern is that reverse takeovers may be used as a 'back door' to secure a listing of a business which would otherwise be ineligible for listing (including an already listed company obtaining a premium listing). When a listed issuer completes a reverse takeover, its shares are usually cancelled from listing, and the newly-enlarged group must prepare a prospectus and satisfy the relevant eligibility requirements in order for its shares to be listed for trading. An acquisition by a listed issuer of another listed issuer's shares is not currently treated as a reverse takeover, and is exempt from the cancellation of shares from listing. The FSA proposes to tighten the exemption, which will apply only to the acquisition by a listed issuer of another issuer which is listed within the same listing category (that is, premium or standard listing).

However, in return, where the reverse takeover regime applies, the FSA has formally confirmed its practice – namely, to apply the rule proportionately. For example, the intention is to reduce some of the information requirements to avoid suspension, not always requiring a prospectus and modifying some of the financial information requirements.

The FSA will require issuers to contact the FSA as soon as possible after a reverse takeover is agreed or in contemplation, in order to consider whether suspension of the issuer's listing is appropriate. For issuers with premium listings, consistent with a theme of the proposed changes (see below), the FSA proposes that the issuer's sponsor should communicate with the FSA on behalf of the issuer. Further details are set out below.

Sponsors (LR Chapter 8)

The FSA proposes to increase the number of situations where the sponsor of an issuer (not the issuer itself) should communicate with the FSA. Consequently, the FSA also proposes to increase the number of situations where an issuer is required to appoint a sponsor. The FSA's proposals clarify its expectations of sponsors when communicating with the UKLA whilst performing sponsor functions, through:

  • applying the Principles for Sponsors to all communications between the FSA and the sponsor of an issuer (not just communications where the sponsor is providing a 'sponsor service', which is the current position);
  • granting the FSA the power to request explanations or confirmations from sponsors in connection with sponsor services, within such time period as the FSA reasonably requires to ensure the LR are being complied with; and
  • obliging sponsors to take all reasonable steps to ensure all communications with the FSA are, and information it provides to the FSA is, "to the best of its knowledge and belief accurate and complete in all material respects".

There is no doubt that the effect of these changes will increase both: the number of occasions when an issuer must appoint a sponsor; and the role, accountability and compliance burden of a sponsor. This ranges from the extension of the principle of honesty and integrity in performing all sponsor services, to notifying any breach of the LR/DTR, through to a number of specific additional responsibilities.

Transactions (LR Chapters 10, 11, 12 and 15)

The majority of the proposed amendments in respect of transactions governed by the LR implement what is already existing practice, following the LR Technical Note. The proposals are summarised below according to LR.

LR10: Significant Transactions (Premium Listing)

The FSA proposes to remove the references to 'revenue nature' currently included in the definitions of 'transaction' for significant transactions (in LR 10.1.3R(3)) and 'related party transaction' (in LR 11.1.5R). It has been noted that use of the term 'revenue nature' is not particularly helpful in either definition.

The FSA proposes to remove notification requirements for class 3 transactions, because the DTR already requires issuers to disclose price-sensitive information.

The FSA proposes changes to clarify the UKLA's approach to break fee arrangements: it notes shareholders should retain control over the ability of listed issuers to enter into break fee arrangements, because such arrangements could result in cost to the issuer without it receiving any measurable benefit. The term 'break fee arrangement' will replace the term 'break fee', as such arrangements may provide for something other than a simple fee, and/or for payment of more than a single amount. The purpose served by the arrangement and whether the listed issuer must make payment to the other party to the failed transaction are important when determining whether an arrangement is a break fee arrangement. If the purpose of the arrangement is that a compensatory sum becomes payable by a listed issuer to another party upon the failure of a proposed transaction, and there is no independent substantive commercial rationale for the arrangement (a 'money for nothing' element), then it will be deemed to be a break fee arrangement. The FSA proposes new guidance as to the type of arrangements which will be considered to be break fee arrangements, and those that might have an independent substantive commercial rationale.

Where a significant change or significant new matter arises following the publication of a circular but before the shareholder meeting convened to seek shareholder approval has been held, the issuer will be required to send a further circular to shareholders including details of the change or new matter, to ensure shareholders have correct and current information in order to make a properly informed decision. It is proposed that any further circular be sent to shareholders at least seven days before the shareholder meeting, but if this is not possible, the meeting may need to be adjourned.

Where a material change to a transaction arises after shareholder approval has been obtained but prior to completion of the approved transaction, the issuer must seek fresh approval of the transaction from its shareholders. The FSA proposes to extend this requirement to also apply to related party transactions (governed by LR 11).

LR11: Related Party Transactions (Premium Listing)

The FSA proposes that requirements governing related party transactions will not apply to any transaction undertaken in the ordinary course of business, not just those transactions in the ordinary course of business which are of a revenue nature, which is the current position.

The FSA proposes to amend the definition of 'associate' to include partnerships (which include limited partnerships and limited liability partnerships) in which a related party has a significant interest. This is consistent with the position in the LR Technical Note.

The UKLA intends the related party transaction rules in LR 11 not to apply to directors' 'loans' which function in a similar manner to an indemnity granted to directors. The FSA invites views to be submitted regarding whether significant transaction rules in LR 10 should apply to loans granted by an issuer to directors for purposes set out in sections 204 to 206 of Companies Act 2006 (expenditure on company business, defending proceedings or in connection with a regulatory investigation). The current approach is that a loan to a director for which a relevant percentage ratio is 25% or more will be subject to shareholder approval, and so shareholders are able to control whether a listed issuer can enter into such loans.

LR12: Dealing in Treasury Shares (Premium Listing)

An issuer must announce to the market when it deals in (i.e. a sale for cash, transfer pursuant to an employees' share scheme or cancellation of) any of its treasury shares. The FSA proposes to introduce a threshold, so that an announcement does not need to be made in respect of every such dealing but, rather, only where such dealings are in excess of 0.5% of the issuer's issued share capital. This amendment would provide clarity to issuers and their advisors, removing a significant administrative burden from and reduce compliance costs for listed issuers.

LR13: Contents of Circulars (Premium Listing)

The FSA proposes to require issuers to post circulars to their shareholders as soon as the circular has been approved. Where, following the publication by an issuer of a circular to its shareholders but prior to the shareholder meeting, there is a material change to the terms of the proposed transaction, any supplementary circular must be sent to shareholders no later than seven days before the date of a meeting in order to allow shareholders sufficient time for review and consideration.

A class 1 circular sent to shareholders must include a declaration made by the issuer's directors taking responsibility for the circular's contents. It is proposed that the declaration required by the LR refer to both the issuer and its directors, so it becomes consistent with the approach of the PR.

The FSA proposes removing the requirement for class 1 disclosures to be included within a related party circular published in respect of a proposed related party transaction where any percentage ratio is 25% or more, as information currently required to be disclosed is often not relevant to the proposed transaction, and commonly issuers request waiver of such disclosure requirements. This would provide clarity to issuers and their advisors, and reduce compliance costs for listed issuers associated with liaising with the UKLA regarding the circular contents.

The FSA notes class 1 circulars commonly contain large numbers of risk factors, which may cloud shareholders' understanding of those risks materially relevant to the proposed transaction for which their approval is sought. The FSA proposes to reinforce that only those risk factors material to the proposed transaction or those new or changed risks to the group as a consequence of the proposed transaction should be included in the circular. This proposal would reduce compliance costs for listed issuers, as fewer risk factors will be subject to UKLA review.

Financial Information (LR Chapters 6 and 13)

The proposed amendments to the LR mainly clarify the FSA's approach, and update the LR to reflect market practice. The proposed amendments focus on the financial information required when assessing a company's eligibility for a premium listing, to be included in a circular sent by a premium listed issuer for approval of a proposed class 1 transaction.

Externally Managed Companies (LR Chapter 5, DTR 3.1 and PR 5.5.3)

An 'externally managed company' is a cash-rich listed issuer with few or no assets, which has been incorporated to acquire and transform target businesses to create value for that issuer. The management of such issuers is outsourced to advisory firms and the directors of the issuer usually consist of non-executive directors, with the executive management function provided by an offshore advisory firm (often, these cash-shells are referred to as 'special purpose acquisition vehicles' – the FSA prefers its term, in order to highlight the devolved management). The FSA outlines transparency and governance concerns: the externally managed company structure impacts on the ability of the issuer's shareholders to hold the management of the issuer to account. The proposed amendments aim to strengthen the reputation of shareholder protection provided by the premium listing label.

The FSA proposes extending the application of the PR and DTR to advisory firms of externally managed companies, meaning that:

  • the advisory firm would become liable for prospectuses published by the issuer, and become subject to disclosure of share dealings in the issuer's shares pursuant to the DTR;
  • the definition of a 'Person Discharging Managerial Responsibility' would not be restricted to the issuer's directors or those directly employed by an issuer; and
  • a person with regular access to inside information and the power to make managerial decisions affecting business prospects of the issuer may be deemed to be a 'senior executive' of the issuer, notwithstanding they do not have an employment or service contract with the issuer.

Wider View

The FSA also proposes that issuers with such corporate management structures cannot be premium listed. Externally managed companies could not apply to become premium listed, and those with such a structure already with premium listings must alter their management structure to one which is more conventional, or have their Official Listing redesignated as a standard listing.

The consultation paper also invites views on whether the premium listing, as governed by the LR, remains a valid benchmark of high standards for listed issuers, and whether the LR could be further enhanced in order to strengthen shareholder protections and overall benefits which they currently provide. The FSA notes the LR form only part of the overall corporate governance architecture: the interaction between the LR and the UK Corporate Governance Code (which is published by, and responsibility for which lies with, the Financial Reporting Council) is noted, in that the LR require a 'comply or explain' statement in an issuer's annual financial report. The consultation paper suggests consideration would be given to enhancing veto rights of minority shareholder over key resolutions such as the appointment of directors, or including additional restrictions on issuers with controlling shareholders to ensure that such issuers can conduct business independently of their controlling shareholders or introducing a new free float requirement effectively allowing minority shareholders to determine the issuer's governance arrangements.

Unlike the other changes, the FSA is merely inviting 'debate' on this topic. If responses are offered to the FSA on this topic, it will consider developing certain options or proposals for discussion in a further consultation later in the year.

Conclusion

Whilst the majority of the amendments proposed will implement recent changes to market practice, the proposed amendments, if implemented, would also have significant consequences for issuers, sponsors and the advisors of external managed companies.

Reponses to the consultation are due by 26 April 2012, and the FSA intends to publish its feedback and policy statement in the summer of this year, with implementation of the rules coming into effect shortly afterwards.

Footnotes

1 The FSA does so in its capacity as the UK Listing Authority ("UKLA").

2 Available from: http://www.fsa.gov.uk/library/policy/cp/2012/12-02.shtml.

3 Available from: http://www.fsa.gov.uk/doing/ukla/ukla_publications.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.