Amendment 13 to the London Stock Exchange's Yellow Book which took effect on 11 January 1999, is the first substantial set of changes to the Listing Rules since the update in September 1997. Amendment 13 is a mixed bag: there are a few new rules; some important deletions (both of old rules and some rules only brought in during 1997); some of the Exchange's unwritten practice has been put into the Yellow Book; and there are a lot of small changes for clarification. The Exchange has also brought in the concept of shelf registration, an idea borrowed from the United States.
The changes are intended to reflect one or more of a number of underlying regulatory principles: to increase the emphasis on disclosure-based rules; to re-evaluate the rules in the light of developments in the market and the practice of other regulators; to review the precise wording of the rules to ensure that they are clear, concise and readily understandable; and to allow for greater flexibility in the application of the Listing Rules. Most of the changes were proposed in the Exchange's Consultative Document published in September 1998.
Terms in italics in this Briefing are terms used in the Listing Rules. Chapter references are to chapters of the Yellow Book.
INTRODUCTION TO THE LISTING RULES
REBRANDING AND EXPLANATORY STATEMENT
The Exchange has rebranded the Listing Department as the "UK Listing Authority". The Exchange goes on to provide a detailed explanatory statement of its position as the UK's competent authority for the purposes of the approval of documents, the consideration of applications for listing and the monitoring of continuing obligations. The aim of the explanatory statement, which has been endorsed by the Treasury, is to clarify the nature and extent of the Exchange's functions to avoid misunderstandings or misconceptions about its responsibilities as UK Listing Authority. In particular it points out that the directors of an issuer have primary responsibility for the accuracy and completeness of listing particulars; the Exchange will not necessarily accept at face value all information provided to it; and the Exchange attaches great importance to the role and responsibilities of a sponsor and, where relevant, to the opinions and reports of the issuer's other professional advisers in satisfying itself that the Listing Rules have been complied with. The Exchange is emphasising that the onus is on the company and its advisers to ensure adherence to the Listing Rules and full and accurate disclosure of relevant information.
GUIDANCE NOTES
The Exchange may issue guidance notes which will not form part of the Listing Rules. The Exchange is following the Takeover Panel's practice of issuing statements from time to time explaining how it expects rules to be applied in particular circumstances.
CHAPTER 1: COMPLIANCE WITH AND ENFORCEMENT OF THE LISTING RULES
CANCELLATION OF LISTING
The Exchange has for the first time included in the Listing Rules the procedures to be followed by a company wishing to cancel its listing. Paragraphs 1.24 to 1.26 set out the Exchange's existing practice: the company must notify the Company Announcements Office and send a circular to shareholders giving at least 20 business days' notice of the intended cancellation date and explaining the reasons for, and the implications of, cancellation. The circular will require prior approval by the Exchange. The provisions will not apply to a de-listing following a takeover once the compulsory acquisition procedures have been complied with.
CHAPTER 2: SPONSORS AND LISTING AGENTS
APPROPRIATE ENTITY
One of the new rules in Amendment 11 was a requirement that a sponsor had to confirm to the Exchange that it was satisfied that a new applicant was an appropriate entity to be admitted to listing. This requirement has now been withdrawn. Sponsors raised concerns about the confirmation, particularly as the Exchange did not provide objective criteria to test whether a company was an appropriate entity. The new rule did not appear to require sponsors to do any additional work in order to make the confirmation, and its deletion should therefore have no effect. However the sponsor's Schedule 4A confirmation has been tightened up; instead of confirming that there are no matters other than those disclosed in the listing particulars or otherwise in writing to the Exchange which the Exchange should consider, now the sponsor must state that all matters known to the sponsor which should be taken into account by the Exchange in considering the particular application has been disclosed in the listing particulars or otherwise in writing to the Exchange.
OTHER RESPONSIBILITIES
The Exchange has also made a few minor changes to Chapter 2:
- paragraph 2.7(d) makes it clear that a sponsor has a responsibility to provide the Exchange with such information as it may reasonably require for the purpose of verifying whether Listing Rules are being, and have been, complied with by an issuer. The sort of thing the Exchange might ask for is for the source of statements about the issuer's market, or details about directors' backgrounds. This is merely confirmation of existing practice.
- paragraph 2.11 requires new applicants to confirm that they have established financial reporting procedures which provide a reasonable basis for directors to make proper judgements about the financial position and prospects of the company. The Exchange has widened the scope of the requirement and, in exceptional circumstances, can ask for the confirmation to be given by listed issuers as well as new applicants.
- the Schedule 1A sponsor's declaration of interests has been amended to emphasise the need for independence. The sponsor will have to confirm that no member of the sponsor team holds any interest in the issuer's securities and that no director, partner or employee of the sponsor who sits on the issuer's board has been or will be involved in advising the issuer as a sponsor. The confirmation has been renamed "Sponsor's confirmation of independence" and must be countersigned by the sponsor's senior compliance officer. This contrasts with the requirement until now simply to disclose any interest - the Exchange is ruling out any possibility of a conflict of interest in the sponsor team.
CHAPTER 3: CONDITIONS FOR LISTING
INDEPENDENT BUSINESS
The fundamental condition for listing has always been that a new applicant must carry on as its main activity, either by itself or through one or more of its subsidiary undertakings, an independent business which is revenue earning for at least three years (paragraph 3.6). The Exchange has reviewed the rule and given itself the discretion to list companies which do not meet this criterion.
New paragraph 3.6A allows a company which does not comply with paragraph 3.6 to be listed if the Exchange is satisfied that such admission is desirable in the interests of the applicant and investors and that investors have the necessary information available to arrive at an informed judgement concerning the applicant and the securities for which listing is sought.
The first limb of paragraph 3.6 is the requirement for control over the revenue earning business. The Exchange has given itself room for manoeuvre to keep up with developments in the market. For example, a cross-border merger could result in underlying businesses being merged but the constituent parties might want to maintain separate listings on their domestic exchanges. The new rule might allow the UK party to maintain its listing. The rule could also be used to allow a company to maintain its listing when it puts its businesses into a joint venture which it does not control.
The second limb of paragraph 3.6 is the requirement to have had a revenue earning track record for at least three years. This now acts as a barrier to high tech companies, which, if they have a revenue earning track record, is probably too short and irrelevant. To stop high tech companies having to wait for three years of full scale revenue earning, and perhaps to stop them going elsewhere for a listing, the Exchange has given itself the ability to relax paragraph 3.6, with the proviso that additional conditions and disclosure requirements can be imposed.
The Exchange has not yet given many clues as to the circumstances in which it might apply paragraph 3.6A, or what additional conditions it would require, but it is likely that the Exchange will take the same approach as it takes to biotech companies in Chapter 20, and apply restrictions on sales by major shareholders. It is anticipated that the Exchange will make its application of this rule the subject of a guidance note as practice develops.
MANAGEMENT CONTINUITY AND EXPERTISE
The Exchange has deleted paragraph 3.7 - the requirement that the directors and senior management of a new applicant should include people who have been responsible for the key parts of the group's business for at least the preceding three years. The Exchange has increasingly relaxed its interpretation of this rule in recent years, and has now dropped it.
The focus is now on paragraph 3.8, which states that the directors and senior management must have collectively appropriate expertise and experience for the management of the group's business. Emphasising the move towards disclosure-based rules, the expertise and experience of the directors and management must be disclosed in the listing particulars; it is now up to the sponsor and investors to decide whether or not a company's management is acceptable.
WORKING CAPITAL
Paragraph 3.10 - the requirement for a working capital statement - has been amended to say that the reference to sufficient working capital being available for the group's present requirements means for at least the next twelve months from the date of issue of the relevant document. The term "present requirements" has never been defined, but sponsors usually understand it to refer to at least the next twelve months, if not longer. The insertion of the twelve-month period into the rule puts this beyond doubt.
CONTROLLING SHAREHOLDER
Amendment 11 brought in a requirement for there to be a relationship agreement between a controlling shareholder (holder of 30 per cent. or more) of a listed company and the listed company. This was seen as formalising a relationship which was supposed to exist between a controlling shareholder and a listed company and was designed to protect the listed company from the dominant influence of a controlling shareholder.
The Exchange ran into problems in enforcing the requirement for a relationship agreement, which appeared to apply immediately to every listed company with a 30 per cent. shareholder. The Exchange's practice was to require companies to introduce relationship agreements whenever they submitted circulars to the Exchange for approval, but problems in obtaining the agreement of controlling shareholders to the arrangements, and whether or not the entry into or amendment of a relationship agreement would be a related party transaction requiring independent shareholder approval, has led the Exchange to conclude that the formal requirement for a relationship agreement is not practicable.
The relationship agreement requirement has therefore been deleted, but it is still a condition for listing, and now a continuing obligation, that a company must be capable at all times of carrying on its business independently of, and at arm's length from, a controlling shareholder. How this requirement is satisfied must now be disclosed in the listing particulars (new paragraph 6.C.23). In addition, the definition of a controlling shareholder has been clarified to include associates within the meaning of Chapter 11 who will be presumed to be acting jointly unless the contrary can be proven.
CASH COMPANIES
The Exchange has deleted paragraphs 3.27 and 3.28 which dealt with suspension and cancellation of cash companies. A company became a cash company if it ceased to have a significant business, either because it disposed of or otherwise ceased to carry on any significant business activity, or because its assets consisted wholly or predominantly of cash. This used to cause problems for small companies which sold businesses for a lot of money - they were at risk of being suspended for being cash companies and therefore theoretically forced to find a way to get rid of the excess cash or face cancellation of their listing. The Exchange has accepted that such disposals can be part of a strategy which is known to and supported by shareholders, and therefore there is no reason to suspend such a company's listing; the market has no problem in fixing a share price in these circumstances. However, where a cash shell is subject to untoward price movements and the smooth operation of the market is jeopardised, the Exchange can still impose a suspension pursuant to paragraphs 1.19 to 1.21 of the Listing Rules.
CHAPTER 5: LISTING PARTICULARS
SHELF REGISTRATION
New paragraphs 5.35 to 5.41 have been inserted in connection with the new system of shelf registration. Further details in relation to shelf registration are set out at the end of this Briefing.
CHAPTER 6: CONTENTS OF LISTING PARTICULARS
DISCLOSURES ON DIRECTORS AND SENIOR MANAGERS
The Exchange has brought into the Listing Rules its unwritten requirement to include what it believes are relevant details about directors and senior managers referred to in listing particulars. New paragraph 6.F.2 requires the inclusion of extensive information: the names of all companies and partnerships of which the individual has been a director or partner at any time during the previous five years; any unspent convictions relating to indictable offences; details of any bankruptcies or individual voluntary arrangements; details of any receiverships or liquidations of companies or partnerships in which the individual held an executive role; and details of any public criticisms of the individual by any statutory or regulatory authority. The Exchange has for some time been using its general powers to require disclosure of details of convictions and bankruptcies, and the new rule largely reflects that.
CHAPTER 10: TRANSACTIONS
SUPER CLASS 1 TERMINOLOGY
Super Class 1 transactions are now to be referred to as Class 1 transactions. (The old Class 1 category was abolished in August 1995.) However, only the name has changed; all the Super Class 1 requirements are still in place.
OPTIONS
The Exchange has made it clear in paragraph 10.1(b) that a grant or acquisition of an option by a listed company should be class-tested as if it had been exercised, except that, where the exercise is solely at the listed company's discretion, the transaction will be class-tested on exercise and only the consideration for the grant will be class-tested on such grant. This reflects the Exchange's current practice on options.
CLASS TESTS
The Exchange has made a number of detailed changes to the class tests designed to reflect its view of the class tests and also to allow a more flexible approach to class-testing transactions. The key changes are:
- the assets-to-assets test now compares gross assets rather than net assets;
- the consideration-to-net assets test has been replaced by a comparison of the turnover of the listed company and the assets the subject of the transaction. This is an additional "trading test" which supports the profits-to-profits comparison;
- allowing the use of industry specific tests to support standard calculations. This means that a pub company could compare numbers of pubs, or a fund manager could compare funds under management. This is another area where guidance notes might be issued.
- confirmation that consideration includes repayment of intercompany or third party debt, and that market capitalisation is based on ordinary shares and does not include preference shares, even if listed. Both of these have until now been unwritten rules.
REVERSE TAKEOVERS
A company's shares are suspended on the announcement of a reverse takeover. Formerly, dealings only restarted following shareholder approval of the reverse takeover. The Exchange is bringing forward the date for dealings to recommence to the date of publication of the relevant circular and listing particulars for the reverse takeover. This is because, once the listing particulars have been published, it is thought that there will be sufficient information available to allow the market to value the company's shares. If a company can announce its reverse takeover and simultaneously publish its listing particulars, there should be no suspension at all.
CHAPTER 12: FINANCIAL INFORMATION
MINOR CHANGES
The Exchange has made a number of minor changes to Chapter 12:
- the requirement for a report on a profit forecast by auditors or reporting accountants and by the sponsor has been extended slightly. A report will also be required where a forecast is made for a significant part of a listed group - formerly it was only where the listed company itself made a profit forecast. There is no guidance on what constitutes a significant part of a listed group;
- where the figures in the half-yearly report are audited or reviewed by auditors (in line with the Auditing Practices Board Bulletins 1993/1 and 1998/6), the review report must be reproduced in full in the half-yearly report itself and in the notification to the Companies Announcements Office.
CHAPTER 16: DIRECTORS
DIRECTORS' DECLARATIONS
Paragraph 16.3 - the requirement for a new applicant to file directors' declarations - has been deleted as the relevant details will be disclosed in listing particulars pursuant to the new paragraph 6.F.2.
Paragraphs 16.4 to 16.6A require directors' declarations to be updated at least every three years. Directors are also obliged to notify any changes to the information in the declaration within 14 days. The Exchange has increased the responsibility of companies to ensure that directors keep their declarations up to date.
The Exchange has stated that it intends to abolish the requirement for all directors' declarations in the near future but has not indicated whether they will be replaced.
BOARD CHANGES
Paragraph 16.7 requires an announcement where a new director is appointed, a director resigns, is removed or retires, or where any director's important functions or executive responsibilities are changed. Formerly the list was shorter. Companies must now notify all changes to the board, other than where a director retires and is reappointed at a general meeting.
An announcement must be made of any board changes even if the effective date has not yet been agreed. Paragraph 16.8 was formerly drafted in a way that allowed companies not to disclose changes until their effective date was known; this loophole has been closed.
CHAPTER 18: PROPERTY COMPANIES
DEFINITION
The definition of property company has been widened to include companies primarily engaged in property activities which include the purchase of land for development of properties for retention as investments.
CLASS TESTS
The special rules for class-testing property company transactions have been revised to concentrate on the size of the transaction compared with the company's existing investment portfolio. The other change is that the ordinary course of business exemption, which applies to acquisitions of property classified as current assets in a company's accounts, has been tightened up. The Exchange now has the ability to deem a transaction not to be in the ordinary course of business because of its size, and subsequent transfers of property assets from current to fixed assets, or vice versa, in the accounts may now be class-testable transactions. The aim of the change is to avoid the situation of companies classifying properties as current assets to avoid having to seek shareholder approval, and then transferring the properties to fixed assets after the acquisition. There was a risk of this being done deliberately to avoid shareholder approval.
CHAPTER 19: MINERAL COMPANIES
LOCK-INS
Paragraph 19.3(g) requires lock-in arrangements to be entered into by directors and senior management of a mineral company which does not have an adequate three-year financial track record. These lock-in requirements have been relaxed slightly to mirror those applicable to scientific research based companies set out in Chapter 20; directors and senior management are locked in for two years (other than for disposals between themselves) and major shareholders (10 per cent. or more) are locked in for six months for the whole of their holdings, and two years for 60 per cent. of their holdings (other than for disposals amongst themselves or to directors and senior management who are also locked in).
CHAPTER 20: SCIENTIFIC RESEARCH BASED COMPANIES
LOCK-INS
The Exchange has responded to widespread concern that the lock-in restrictions in Chapter 20 were too harsh, in that they applied to holders of 3 per cent. or more. The lock-in threshold has been increased to 10 per cent., which should cut down considerably the proportion of a company's shares which are locked in, and should therefore make fund-raising easier and markets in biotech company shares more liquid.
CHAPTER 21: INVESTMENT ENTITIES
OEICS
Paragraph 3.18, which requires a minimum of around 25 per cent. of a company's shares to be in public hands, no longer applies to OEICs.
CHAPTER 25: COMPANIES UNDERTAKING MAJOR CAPITAL PROJECTS
DELETION
Chapter 25 has been deleted, on the basis that a company which might otherwise fall into Chapter 25 can now be listed pursuant to the discretion to list unusual companies in paragraph 3.6A.
SHELF REGISTRATION
The most important development in Amendment 13 is the introduction of a shelf registration system. Shelf registration allows a listed company to publish an annual "shelf document", which will contain most of the information required to be included in listing particulars. If, at any time during the next 12 months, the company wishes to issue and list further securities, all it needs to do is publish an "issue note", which is a short document containing the information required to complete and update the shelf document. The idea is that the information disclosed by both documents read together is on a par with that which would be found in listing particulars. The Exchange has brought in the system partly because many overseas exchanges allow it, and partly because it is an attractive alternative to listing particulars for companies which issue shares frequently.
The proposal is that a company uses its accounts as the basis of its shelf document, with the addition of information required by paragraph 6A of the Yellow Book (persons responsible and advisers), paragraph 6C (the issuer and its share capital) and a report on any profit forecast. A company could either produce its accounts as normal and add the extra information into a wraparound, or include the extra information in its accounts so that the accounts themselves constitute the shelf document. When the company comes to issue shares, it would then only have to produce the issue note, which would contain the relevant Chapter 6 information not disclosed in the shelf document, and also update the shelf document. Both documents have to be approved by the Exchange, and together will constitute listing particulars. The shelf document must be put on the Exchange's website, and the issue note is to be sent to shareholders.
The Exchange will shortly publish a guide to assist issuers and their advisers with the procedures involved in the shelf registration system.
It will be interesting to see how many companies take advantage of the shelf registration system; while the system is popular overseas and may therefore prove attractive to global companies, time will tell whether the new system will come into general use by the Exchange's traditional customer base of UK companies.
This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.