UK: Major Changes Proposed For Controlled Companies With A Premium Listing

Last Updated: 18 January 2013
Article by Amerjit Singh Kalirai

On 26 January 2012, the FSA issued consultation paper CP 12/2 in relation a large number of proposed changes to the Listing Rules.

At the time, there was a significant amount of debate about the increasing number of controlled companies on the premium segment of the Official List that had most of their assets and trading operations in overseas jurisdictions, as well as their controlling shareholders. In particular, it was noted with concern that tracker funds were obliged by their rules to invest in many such companies due to the fact that they were included in the FTSE indices. The FSA noted such concerns in the consultation paper and, whilst it distanced itself from the rules regarding the constituent members of the indices, declared that it would in the future consult upon changes to the Listing Rules and issues around the quality of the premium listing regime, free float requirements, minority shareholder protection and corporate governance in order to ensure that it is meeting its statutory objectives.

On 2 October 2012, in consultation paper CP 12/25, the FSA published its feedback on the changes proposed in CP 12/2. These changes are discussed here in this edition of Market reCap. Most of the changes set out in CP 12/2 came into effect on 1 October 2012. In CP 12/25, the FSA also consulted on proposed changes to the Listing Rules primarily designed to enhance the overall quality of the premium listing regime in light of the concerns voiced at the start of the year.

The most significant proposals are briefly set out in this article. There are likely to be substantial changes by the time the final rules are published.

Unless otherwise stated, the changes explained in this article apply only to companies with a premium listing.

Free float

As noted above, the origin of the disquiet voiced amongst the investor community was the obligation imposed upon some investment funds to invest in certain companies that obtain a premium listing even though they have a controlling shareholder. Companies such as ENRC and Bumi are high profile examples. FTSE has subsequently amended certain rules regarding the criteria for entry into the relevant indices. The FSA noted that there was a significant difference of opinion in the market between those representing investors, who predominantly thought that the free float threshold should be raised in order to protect minority investors, and those representing issuers, most of whom thought that raising the threshold would deter many issuers from joining the London financial markets.

The FSA noted that under the framework of the proposed Financial Conduct Authority objectives, which will become directly applicable to the UK Listing Authority ("UKLA"), the UKLA must have regard to regulatory principles, including proportionality. The FSA acknowledged that the primary purpose of the free float requirement was to ensure sufficient liquidity in a secondary market, rather than ensure adequate governance.

The FSA has proposed a retention of the current 25% threshold for shares in public hands, subject to certain amendments to the current regime. Shares that are subject to a lock up period in excess of 30 days will be excluded from the calculation of shares in public hands. The FSA also set out proposed guidance regarding the circumstances in which it may allow a dispensation from the 25% requirement, although it will say that it will be unlikely to agree a dispensation below 20%, other than in exceptional circumstances.

Importantly, in relation to companies on the standard segment of the listing regime, the FSA said that it proposes to allow admission even with very small percentages of shares in public hands, as long as there is likely to be sufficient liquidity in the secondary market.

Control of business

Under the proposals, a new issuer must control the majority of its business, rather than the majority of its assets.

New guidance is proposed to describe situations in which the FSA believes that an applicant is not able to carry on an independent business.

Independence

Under the proposals, a new applicant will need to demonstrate that it will be carrying on an independent business as its main activity.

Relationship agreements

The FSA is proposing to reinstate the old requirement from the "yellow book" listing rules that an issuer must be capable of acting independently of a controlling shareholder and its associates. Those acting in concert will need to be aggregated, although there is little detail as to who will be considered by the FSA to be acting in concert. Hopefully, there will be guidance in the final rules. Predictably, 30% is the threshold for control.

The FSA is proposing to reinstate the express requirement for a relationship agreement between a company and its controlling shareholder. It has set out certain mandatory content requirements, including the somewhat difficult requirement that the 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. Expect changes to this in the final rules. The existence of the relationship agreement will be a continuing obligation for issuers, and material amendments to the relationship agreement will need approval via a vote of independent shareholders.

Independent directors

The FSA is proposing to introduce a new requirement that, where an issuer has a controlling shareholder, the board of the issuer should be constituted such that independent directors form a majority of the board, or an independent chairman and independent directors together make up at least half of the board. Independence will be defined through a cross-reference to the UK Corporate Governance Code.

Independent directors will need to be appointed through a two vote process, including an independent shareholder vote where the controlling shareholder is not allowed to vote. If the two votes conflict, a further vote will take place not less than 90 days later on a simple majority basis. As a result, a controlling shareholder would ultimately get its wish if it was determined to pursue an appointment.

Interestingly, although perhaps not surprisingly, nothing is said about the removal of independent directors, which is at least as important as the appointment process, since effective independence requires security of tenure.

Reporting obligations

The FSA proposes to expand the current obligation to report to the FSA any non-compliance with the free-float requirement to an obligation to report any non-compliance with any of the continuing obligations imposed on a premium segment issuer.

Listing principles

The standard listing regime is predominantly based on the requirements of EU legislation, whereas the premium listing regime has super-equivalent additional requirements that are deemed appropriate by the FSA for its flagship listing regime. Notwithstanding this, the FSA has proposed that two of the listing principles that previously applied only to premium listed companies, should also apply to standard listed companies. These are the listing principles that require a listed company to have adequate systems and controls in place to comply with its regulatory obligations, and for a listed company to deal with the FSA in an open and co-operative manner.

Certain of the remaining listing principles have also been amended. In particular, listing principle 1 imposes an obligation on a premium listed company to take reasonable steps to enable its directors to understand their responsibilities and obligations as directors. It is proposed that this is extended by the creation of a continuing obligation for a premium listed company to disclose in its annual report details of the steps it has taken to ensure that it has addressed Principle B4 of the UK Corporate Governance Code, which imposes an overlapping requirement.

Conclusion

Whilst at first glance the proposed changes do not seem particularly onerous, they present a considerable number of challenges. In particular, the requirement to address the existence of potential concert parties and potential controllers will need to be considered and explored in the context of IPOs on the main market. The growing importance of such an evaluation is clearly demonstrated by the current investigation by the Takeover Panel into the concert party that existed at Bumi and should have been "whitewashed" at the time of the transaction.

Interestingly, the consultation paper does not deal with how the proposals will be implemented in respect of companies that already have a premium listing. Presumably the new requirements would apply to those companies, subject to some form of grandfathering provision. It will also be interesting to see if the AIM Rules are also amended to deal with some of the governance issues raised by controlled companies. As it is, the proposals might make the AIM market a more attractive market for issuers that are concerned by the increasing volume of regulation faced by issuers with a premium listing.

The consultation period in respect of these proposals ended on 2 January 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.

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 Topics
 
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions