UK: CP 12/25 - Proposed Changes To The Listing Rules

(Controlling Shareholder And Majority Interest In Business)
Last Updated: 26 November 2012
Article by Nicola Rabbitts and Mark Howard


On 2 October 2012, the Financial Services Authority (FSA) published consultation paper CP12/25 (CP12/25) to set out feedback to consultation paper CP12/2 (CP12/2) and present further consultation on amendments to the Listing Rules (LRs). During the CP12/2 consultation, the FSA also raised some wider issues about the nature of the premium listing standard including general issues around "free float" requirements and minority shareholder protection.

CP12/25 is therefore a consultation on proposed amendments to the LRs to enhance the effectiveness of the listing regime following on from some of those issues raised under CP12/2. For purposes of this article we will focus on the proposed changes regarding independent business.

Independent business

The FSA are proposing to amend LR 6.1.4 by separating it into two separate rules and including guidance setting out factors they will consider. The rule currently states that an applicant to the premium segment must show that it controls most of its assets and that it will be carrying on an independent business as its main activity. The two separate rules will cover provisions relating to:

  • controlling shareholder and relationship agreements; and
  • control of business.

Controlling Shareholder and Relationship Agreements

A premium listed issuer must be capable of acting independently of any controlling shareholder and its associates (proposals include definitions of both terms).

A controlling shareholder is a person who holds 30% or more of the shares or voting power in the issuer or its parent undertaking.

If an issuer has a controlling shareholder, the FSA is proposing to insert the requirement for a relationship agreement to be in place to govern the relationship to ensure the issuer is capable of carrying on its business independently. The proposed amendments include mandatory content requirements for the relationship agreement including, inter alia, that a controlling shareholder must not influence the day to day running of the new applicant at an operational level or hold or acquire a material shareholding in one or more significant subsidiaries and the a controlling shareholder must abstain from doing anything that would have the effect of preventing a new applicant from complying with its obligations under the LRs. The requirement for a relationship agreement will be a continuing obligation and any material amendments to the relationship agreement may only be made with shareholder consent.

Another proposal by the FSA is to require the directors of the issuer to state, in the Annual Report, that the company has complied with the relationship agreement throughout the relevant year. Where they have not complied with the agreement, the UKLA must be informed and details should be provided so the shareholders can evaluate the impact of the non-compliance.

Control of business

It is proposed that a new applicant must demonstrate that it controls the majority of its business, rather than assets, as is the case currently in the LRs. The proposals state that to show control, premium listed companies should be able to, inter alia, keep the market informed of price sensitive information on a timely and on an ongoing basis and be in a position to drive forward the agenda of the company in question. These factors should apply to at least the majority of the applicant's business. The ability to exercise only negative control or veto significant decisions would not be considered as control. If control relies on contractual arrangements that could be altered without the agreement of the company, this too would not satisfy the control requirement.

This element of control of business is proposed as a continuing obligation and, as such, would have to be adhered to on a constant basis.

Independence of directors

In conjunction with the introduction of the concept of controlling shareholder, the FSA is proposing to amend the LRs to require a premium listed issuer with a controlling shareholder to ensure their board of directors has either a majority of independent directors or an independent chairman and independent directors together making up at least half the board. The concept of independence will continue to be determined in line with the Code.

Mineral companies

The FSA is proposing to exempt mineral companies from the requirement to control the majority of their business. This is due to the fact that co-venturing investment structures which are common in mineral projects are well established and accepted in this sector and investors are well accustomed to these arrangements.

What next?

Responses to the proposals set out in CP12/25 should be submitted to the FSA by 2 January 2013 via an online responses form which you can find at .

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.

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Nicola Rabbitts
Mark Howard
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