UK: New Premium Listing Option In London For Sovereign Controlled Companies

The client memorandum summarizes new rules issued by the U.K. regulator to create a new premium listing category for "sovereign controlled commercial companies" (SCCs). This new category will be available for listings of SCCs from 1 July 2018.

In a Policy Statement published on 8 June 2018 the U.K.'s Financial Conduct Authority (the FCA) confirmed that it would be proceeding with the proposals that it announced and consulted on in July 2017 to create a new premium listing category for "sovereign controlled commercial companies" ("SCCs"). This new category will be available for listings of SCCs from 1 July 2018.

Overview

The FCA is largely proceeding with the proposals made last year to create a new premium listing category in the U.K. Official List of securities that will relax some of the existing premium listing rules for SCCs. The new rules are designed to allow SCCs to benefit from a premium listing without having to comply fully with the "controlling shareholder" and related party transactions (RPTs) requirements of the premium listing rules. In addition, as a special concession to SCCs, a premium listing will be available for depositary receipts (DRs) issued by them as well as for their equity shares. However, the FCA has stepped back from including in the new SCC premium listing rules two other exemptions from the existing premium listing requirements that it originally proposed should be available to SCCs:

  • The announcement obligations that apply to issuers in respect of RPTs, and
  • Independent voting on the election of independent directors.

SCCs applying for admission to the new SCC premium listing category will have to comply with the above two premium listing requirements as well as all those other premium listing requirements applicable to corporate issuers that have not been disapplied for SCC issuers.

Summary of the New SCC Premium Listing Rules

Issuers eligible – state-controlled corporate issuers with a State shareholding of 30% or more

Premium listing rule exemptions under the rules

  • No requirements for "relationship agreements" between the State and the issuer
  • No need for shareholder approval of any RPTs between the State and the issuer

DRs of state-controlled corporate issuers will be eligible for premium listing

  • But these are not currently eligible for inclusion in FTSE indices
  • All other DRs remain eligible for a standard listing only

All other existing premium listing eligibility and on-going requirements will apply—for example:

  • shareholder approval will be required for significant M&A transactions
  • issuers must adopt the U.K. Corporate Governance Code
  • independent shareholder voting on election of independent directors
  • issuers must give shareholders pre-emption rights on further issuances for cash
  • "weighted voting shares" will not be eligible for listing
  • issuers must appoint a "sponsor" to give advice about the rules

The rest of this briefing discusses the reasons for the FCA creating this new premium listing category and how the new requirements of the listing are intended to work.

Why the New Premium Listing Category?

Last year, when Aramco was considering an international listing as part of its planned IPO, attention turned in the U.K. as to whether compliance with certain requirements in the FCA's premium listing rules may be too difficult or unduly onerous for state-controlled companies. The concern was that companies would prefer to list in New York or elsewhere, or possibly even on the standard category of the U.K. Official List, rather than with a premium listing in London.

To address this concern, the FCA decided that it might be possible to relax those parts of the existing premium listing rules that state-controlled companies would likely find the most difficult to deal with and issued a consultation paper on its proposals in July 2017. Reactions to these proposed relaxations were—as the FCA comments in its Policy Statement—"divergent and polarised" with, overall, a small majority of respondents being opposed to the proposed new premium listing category for SCCs.

Opposition to the proposals centered on the concern that the new rules would dilute premium listing standards and that the FCA's arguments that the relationship between sovereign controlling shareholders and their SCCs is significantly different from that of other controlling shareholders and their companies were unconvincing.

The FCA's Justification for the New Premium Listing Category

The FCA sees the creation of this new listing category as being an appropriate regulatory response to evolving capital markets and types of investment risk. In particular, the FCA argues:

  • So long as there is full transparency—including in the name of the listing category—on the different standards applicable to premium-listed SCCs, it is better to allow investors a wider choice of premium-listed equity for which eligibility and on-going disclosure requirements are significantly higher than those for standard listings.
  • Investors are accustomed to assessing sovereign risk and therefore can be expected to be able to take a relatively informed view about investing in a SCC where there will not be in place the same investor protections as there are with a premium listing for other commercial companies.
  • SCCs are likely to have a different relationship with their sovereign controllers than other corporate issuers will have with their controlling persons, influenced by issues of public policy and service and involving a much more complex web of governmental organisations and entities.
  • Arguably, there will be much more information in the public domain about this relationship (as well as the sovereign state itself) than might be the case for non-sovereign controlling shareholders, enabling investors to make a more informed assessment about that relationship and its implications for their investment.
  • Initial disclosures about this relationship in an IPO prospectus and on-going disclosures required under the Market Abuse Directive (MAR) and now, following the FCA's revision of its proposals, under the listing rules relating to RPTs should provide full transparency to the market about interactions between a sovereign controller and its SCCs that are of significance to investment in the SCC.
  • The revised proposals will enable investors to engage with SCCs on the key issue of board composition through retaining the existing premium listing rules on the election of independent directors.
  • SCCs are quite likely to enter into numerous transactions with different entities related to the sovereign and therefore the full application of the existing premium listing rules on RPTs—especially the shareholder approval and the analysis required to determine whether transactions fall outside of those rules—would impose an unduly onerous burden on the SCC and sponsors.
  • The vast majority of the premium listing rules will still apply to SCCs, demonstrating that the FCA's approach has been only to relax those few key rules that would likely present significant problems for SCCs and might encourage them to seek a standard listing in London—with the much lesser investor protection or comfort that standard listings provide—or a listing outside of the U.K.
  • The FCA has now addressed the concerns and arguments against the disapplication of the two important premium listing requirements and believes that its revised proposals strike the right balance between encouraging SCCs to list in London with a premium listing while protecting investors by retaining maximum application of the premium listing standards to the extent consistent with the special position of SCCs.

What is the Difference Between a UK Premium and a Standard Listing?

A standard listing imposes on issuers the EU-wide harmonised listing requirements for equity, debt and DRs. These include basic eligibility requirements and the application of on-going disclosure and transparency requirements under the Transparency Directive and the MAR.

A premium listing imposes on issuers additional eligibility and on-going requirements that are intended to provide investors with greater engagement rights with the issuer—including voting on certain significant M&A, RPT and other actions. A premium listing also imposes demanding requirements with respect to corporate governance, including the application of the broad principles and provisions of the U.K. Corporate Governance Code. In addition, where a premium listed issuer has a controlling shareholder, the listing rules include requirements designed to help protect the independence of the issuer. These are discussed further below.

Currently, a premium listing is only available for the equity shares of a corporate issuer (or the securities of a closed-ended investment fund or open-ended investment company). It is not available for debt securities or DRs.

Without a premium listing, companies are not eligible for inclusion in the FTSE U.K. Index Series. As the FCA points out in its Policy Statement, the other requirements that must be satisfied in order to be eligible for inclusion in those indices—such as the "nationality" or (for non-U.K. issuers) enhanced free float requirements—are not the responsibility of the FCA and are set and regulated by the index operator (in the case of the FTSE U.K. indices, a subsidiary of the London Stock Exchange).

The FCA's view, therefore, is that the concerns that some respondents expressed about passive investors being exposed to SCCs with "weaker" premium listing requirements than other commercial companies included in the FTSE U.K. indices are not in themselves reasons for objecting to the proposals, but are issues for the index operators to consider and address as they may think appropriate.

Which Issuers Will Be Able to Qualify for Listing as a SCC?

The new premium listing category will be available to commercial companies that have a "sovereign controlling shareholder," which is defined as being "a State which exercises or controls 30% or more of the votes able to be cast on all or substantially matters at general meetings of the company".

The 30% test is set at the same level that applies to the existing rules relating to non-sovereign "controlling shareholders" of premium listed companies. "State" is defined as being: (i) the sovereign or other head of a State in their public capacity, (ii) the government of a State, (iii) a department of a State, or (iv) an agency or special purpose vehicle of a State, including an agency or SPV of (i), (ii) or (iii). A sovereign controlling shareholder must be "a State" that is recognised by the U.K. government and may even be the U.K. itself (if it were to be a controlling shareholder—as technically it currently is, for example, in the bank, RBS—in a company that wished to apply for a SCC premium listing). 

The Two Key Premium Listing Requirements to be Disapplied in Relation to SCCs

Controlling shareholder agreements

Premium listed companies with a controlling shareholder must enter into an agreement with the controlling shareholder—commonly referred to as a relationship agreement—containing minimum terms intended to ensure that: (i) transactions with the controlling shareholder are conducted on arm's length and normal commercial terms, (ii) no action will be taken by the controlling shareholder (or its associates) to prevent the listed company from complying with its listing obligations, and (iii) neither the controlling shareholder nor its associates will propose a shareholder resolution which appears to be intended to circumvent the proper application of the listing rules.

Where the listed company is not in compliance with these or certain related requirements with respect to the relationship agreement it is penalised under the Listing Rules by effectively having to get all RPTs approved by an independent shareholder vote, including those that are normally excused from this requirement because of their size or they are in the ordinary course of business. None of these requirements will apply to SCCs.

Shareholder approval of RPTs/sponsor confirmation of small RPTs

The existing premium listing rules essentially require:

  • all RPTs that are not in the ordinary course of business and have values that equal or exceed 5% as determined by the "class tests" that are used to classify those transactions that require shareholder approval as "significant transactions" to be approved by an independent, simple majority vote of shareholders,
  • "smaller" RPTs that have values of between 0.25% and 5% to be confirmed by the company's sponsor as having terms that are fair and reasonable as regards the company's independent shareholders,
  • an announcement to the market of prescribed details of the RPT as soon as it is entered into, and
  • where, over a 12 month period, the aggregate value of all RPTs (no matter what their size) equals or exceeds 5%, independent shareholder approval to be obtained in respect of the latest RPT.

Under the new premium listing category for SCCs:

  • no independent shareholder approval will be required for RPTs,
  • no sponsor confirmation of the fairness and reasonableness of the terms of smaller RPTs will be required,
  • however, the terms of a SCC's RPT will have to be announced to the market as soon as it is entered into.

Key Premium Listing Requirements that Will Apply to SCCs

Apart from the two key premium listing requirements mentioned above, all the other premium listing requirements that apply to "non-sovereign" corporate issuers will apply to any SCC listings in the new premium listing category, both as regards eligibility and on-going disclosure and shareholder engagement requirements. The FCA has included a helpful table in its Policy Statement setting out which of the existing premium listing rules will (or will not) under its final proposals apply to SCCs and this is reproduced at the end of this note. Some of the most significant of these rules that will apply to SCCs are briefly summarised below.

Independent shareholder voting on the election of independent directors

U.K. corporate governance requirements, rather than the Listing Rules themselves, set independence requirements for the boards of premium listed companies. However, the premium listing rules require the election of independent directors to be approved—by simple majority vote—by both the whole body of shareholders (including any controlling shareholder(s)) and separately by the independent shareholders (i.e. excluding the controlling shareholder(s)). If the election of the director is not approved by both sets of shareholders and the company wishes to proceed with the appointment of the director, the rules set a 90 day "cooling off" period before a further resolution is proposed for the election of the director on which all shareholders together can vote.

Disclosure obligations in respect of RPTs

As mentioned above, all RPTs with a value of above 0.25% must be announced to the market as soon as the transaction is entered into, with details being given of the related party, the consideration for the transaction, a brief description of it and any other relevant circumstance. These announcements are required, whether or not the RPT would constitute "inside information" in relation to the company that would have to be announced under MAR. Announcements are also required of any RPT (no matter what its value or size) if in any 12-month period the aggregate value of all RPTs of the company equals or exceeds 5%.

Shareholder approval for significant transactions

Transactions, other than those entered into in the ordinary course of business, that have a value of 5% or more—tested by reference to the premium listed company under four separate classification tests—have to be announced to the market as soon as their terms have been agreed. Those that have a value of 25% or more must also be approved by a simple majority vote of shareholders. The premium listing rules prescribe the details of the transaction and other matters, including financial information that must be given in any such announcement or in the circular calling the shareholders' meeting to approve the transaction.

Share buybacks and other own-share dealings

The premium listing rules also set out various notification and other requirements with respect to share buybacks and other dealings by a company in its own securities, including any purchases from a related party to the company (essentially a director or a 10% shareholder or its associates). Importantly, in the case of share purchases from a sovereign controlling shareholder, the new premium listing rules for SCCs will specifically state that the disapplications mentioned above with respect to shareholder approval, or sponsor confirmations with respect to fairness and reasonableness, of RPTs will not be available to the SCC in the case of share purchases and so must be complied with (as would be the case for any other premium listed commercial company).

Independent business and control

Despite having a sovereign controlling shareholder, a SCC will still need to satisfy all the existing premium listing eligibility requirements, including with respect to carrying on an independent business as its main activity and exercising operational control over that business. Where a SCC has granted or may be required to grant security over its business in connection with the funding of a sovereign controlling shareholder, the new listing rules will state that that may indicate to the FCA that the SCC cannot satisfy the independent business eligibility requirement.

Free float

In its feedback on its proposals in its Policy Statement, the FCA explained that it was not planning changing the existing free float requirements of the premium listing rules, despite some respondents being concerned about the likelihood of SCCs being admitted to the new listing category with low free floats. This means:

  • the FCA will continue to have the right to allow a listing where the standard minimum free float level of 25% is not satisfied, provided there is sufficient liquidity in the shares to be listed—very large companies (which SCCs typically tend to be) may be able to make out a credible case to the FCA that the significant size of the shares in public hands will deliver a liquid market in the listed shares with a free float of less than 25%, and
  • since the free float is determined on the basis of the particular security being listed, where DRs are to be listed, the percentage free float of the underlying equity represented by the DRs could be very low, even where the DRs themselves meet a 25% level.

No weighted-voting shares, etc.

The FCA has taken the opportunity in its Policy Statement to reaffirm the importance it attaches to the core premium listing principle that shareholder rights, especially voting rights, should be proportionate to the economic interest that their shares have in the listed company and to warn that it has in the past resisted calls to give minorities undue veto rights in premium listed companies.

Others

Other important features of the U.K.'s premium listing regime that will apply to SCCs include the requirement to benchmark their corporate governance against the U.K. Corporate Governance Code, to appoint an approved financial adviser (sponsor) to provide advice to the listed company with respect to its listing application and subsequently on certain of its listing obligations and to provide certain confirmations with regards to the company to the FCA, and allow shareholders pre-emption rights with respect to further issues of equity for cash.

As explained below in relation to DRs, these premium listing requirements will also be applied in respect of any DRs for which a SCC wishes to apply for a listing in the new SCC premium listing category.

Premium Listing of SCC DRs

A particularly novel and important feature of the new SCC premium listing category is that for the first time DRs, and not just equity shares, will be capable of qualifying for a premium listing. However, it will only be DRs of SCCs, and not of any other commercial company, that can be granted a premium listing. Other companies' DRs will still only be eligible for a standard listing.

By allowing SCC DRs to be given a premium listing, the FCA is recognising that it is likely that many investors in the London market looking to invest in the equity of SCCs would prefer to be invested in an English-law governed security—a DR—that would be eligible for settlement in CREST (London's electronic securities settlement system), rather than a foreign-law governed equity share. Therefore if SCCs are to be attracted to the London market by this new premium listing category, a listing will have to be available for DRs as well as equity shares themselves.

Eligibility requirements

The eligibility requirements for a SCC's DRs to qualify for a premium listing largely replicate the eligibility requirements for the premium listing of the SCC's equity shares. These will also include a requirement for a 12-month minimum working capital statement to be given by the SCC. Since the prospectus rules do not require a prospectus for DRs to include such a statement, where it is not included in the admission prospectus, the SCC will have to publish the statement separately at the same time as the prospectus is published.

Premium listing voting rights of DR holders

Another additional and fundamental listing requirement will be that the SCC can demonstrate (and has in place arrangements that ensure) that the rights attached to the equity shares underlying the DRs are capable of being exercised by the DR holders as if they were holders of those underlying shares. This is required in order to ensure that the various premium listing rights and protections that investors expect and understand a premium listing to provide can be effectively exercised by them even though they may only hold DRs, rather than the shares themselves in respect of which the DRs have been issued.

As a result, holders of the class of the SCC's equity shares that the DRs represent and the DR holders themselves must be able to vote on those matters on which the premium listing rules require shareholder approval to be obtained. Where an independent vote of SCC shareholders is required on the election of independent directors, only the independent shareholders (i.e. non-sovereign controlling shareholders) and independent DR holders will be permitted to vote.

FTSE UK Index Series

Under the current FTSE U.K. Index Series eligibility criteria, only companies with equity shares listed in the premium listing category are eligible for inclusion in the FTSE U.K. Index Series. The FTSE U.K. Index Series eligibility criteria would need to be amended to include listing of DRs.

Transferring From or to, or Exiting, the New Premium Listing Category

The new SCC premium listing category is only available for securities of issuers with a sovereign controlling shareholder. Where the issuer no longer has such a shareholder, the FCA will consider cancelling the listing of the securities or requiring the issuer to transfer its listing to another category.

Existing premium listed issuers who wish to take advantage of the relaxations available to SCCs under the new premium listing category by transferring to it and SCCs who subsequently wish to leave the premium listing category and transfer to a standard listing, will have to obtain the approval of their listed shareholders or (in the case of a SCC DR premium listing) their DR holders. Transferring the listing of equity shares from the new SCC premium listing category to the 'normal' premium listing of equity shares of commercial companies will not require any shareholder approval since that would result in greater, rather than less, premium listing protection for investors.

Where a shareholder or DR holder vote is required to approve a transfer to or from the new premium listing category, the approval must receive, at the relevant shareholder or DR holder meeting, a 75% vote in favour and this must include a simple majority of the independent shareholders or DR holders (i.e. the non-sovereign controlling shareholders or DR holders) voting on the resolution.

Next Steps

The necessary rule changes to the FCA Handbook to establish the new premium listing category will become effective on 1 July 2018. We will have to see if the largely negative reaction of investors to the proposed new premium listing category will continue once the new rules become effective and the extent to which eligible SCCs find the relaxations in the U.K.'s premium listing rules offered by the new listing category sufficiently attractive to decide to list in London rather than elsewhere, such as New York, where even greater accommodations are available to foreign issuers. Finally, we will also have to wait and see what changes (if any) are made to the FTSE Indices Rules to take account of any take up of this new premium listing category.

Premium Listing Rules Applicable to the New SCC Listing Category

Figure 1: Key requirements applicable to new listing category[1]

EXISTING PREMIUM REQUIREMENTS C17/21 FINAL RULES
Controlling shareholder agreement (LR 6/9) No No
RPTs – shareholder approval and sponsor fair and reasonable opinions (LR 11) No No
RPTs – announcement obligations (LR 11) No Yes
Independent votes on election of independent directors (LR 6/9) No Yes
Independent business (LR 6/9) Yes Yes
Control of business (LR 6/9) Yes Yes
Track record (LR 6) Yes Yes
Shares in public hands (LR 6/9) Yes Yes
Premium listing principles including equality of treatment (LR 7) Yes Yes
Sponsor regime (LR 8) Yes Yes
FRC Corporate Governance Code reporting (LR 9) Yes Yes
Pre-emption rights (LR 6/9) Yes Yes
Significant transactions regime including class tests (LR 10) Yes Yes
Dealing in own shares (LR 12) Yes Yes
Shareholder circulars (LR 13) Yes Yes

Footnote

1 Copyright of, and reproduced with the permission of, the FCA.

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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