UK Listings Review Report One Year On

Lord Hill's UK Listings Review Report (the "Report"), published in March 2021, aimed to enhance London's attractiveness as a leading listing venue in a post-Brexit world (see the Ashurst legal update). The Report swiftly followed the Kalifa Review of UK FinTech (the "Kalifa Review"), published in February 2021, and echoed the Kalifa Review's focus on better positioning London as a go-to global listing destination for founder-led tech firms. Whilst the UK's high standards of corporate governance and regulation are internationally recognised, as set out in both the Report and the Kalifa Review, between 2015 and 2020, London accounted for only five per cent of IPOs globally.

The political and regulatory will to drive reform in UK capital markets has been clear following the UK's departure from the EU. A suite of significant rule changes came into effect promptly following the publication of the Report, whilst other broader proposals, namely in relation to the structure of the UK prospectus and listing regimes, are in more nascent stages of implementation.

One year on from the publication of the Report, we look here at some of these key developments.

Listing Rule Updates

The Financial Conduct Authority (the "FCA"), acknowledging the importance of dynamic capital markets, welcomed the Report and was quick off the mark to introduce changes to the Listing Rules in response to Lord Hill's recommendations.

SPACs

The FCA responded with particular alacrity to Lord Hill's recommendation concerning special purpose acquisition companies ("SPACs") or "blank cheque" companies. Cognisant of the strong performance seen in the SPAC market in other major jurisdictions, in April 2021 the FCA launched a consultation on proposed changes to the Listing Rules to facilitate SPAC listings.

At the time of the FCA consultation, the Listing Rules provided that, upon the announcement (or leak) of an acquisition, a general presumption of suspension applied for a SPAC's listing. The share trading suspension rule - absent in competitor jurisdictions such as the US and Amsterdam - was removed for commercial companies in 2018, but explicitly retained for shell companies, including SPACs. Whilst the purpose of the rule was to protect investors from disorderly markets due to insufficient information being available, as cited in the Report, the rule was perceived to be a key obstacle to SPAC listings in London as it meant investors ran the risk of being "locked-into" their investment for an unknown duration following an announcement.

The FCA's final rules and guidance in relation to SPACs, published in Policy Statement 21/10 - Investor protection measures for special purpose acquisition companies: Changes to the Listing Rules, took effect in August 2021. The rules, which broadly follow the consultation proposals, remove the presumption of suspension upon the announcement of an acquisition, provided the SPAC has in place certain structural investor protection features and provides adequate disclosures. Hambro Perks Acquisition Company was the first SPAC to take advantage of the new regime with a listing in November 2021.

Broadly, the new Listing Rules provide an alternative route to market for SPACs where the following conditions are satisfied:

• a minimum size threshold of £100 million at initial listing – a significant reduction from the initial size threshold proposed by the FCA of £200 million. Notably, the £100 million must be raised by public shareholders, which excludes funds from founders or sponsors of the SPAC;
• a "redemption" option allowing investors to exit a SPAC prior to any acquisition being completed;
• ensuring money raised from public shareholders is ring-fenced via an independent third party and is used: (i) as consideration for a reverse takeover; (ii) to redeem or repurchase the company's own shares; (iii) to return to shareholders in the event a reverse takeover has not taken place within a specified timeframe (see below); or (iv) to return to shareholders in the event of the winding-up of the SPAC;
• requiring board approval of any proposed transaction, and excluding from the board discussion and vote any board member that: (i) is, or has an associate that is, a director of the target or its subsidiaries; or (ii) has a conflict of interest in relation to the target or its subsidiaries;
• requiring shareholder approval for any proposed acquisition, with SPAC founders, sponsors and directors prevented from voting;
• a two-year time limit on a SPAC's operating period if no acquisition is completed which can be extended by 12 months with shareholder approval. An additional six month extension (that is not subject to shareholder approval) is available in limited instances to allow the SPAC more time to conclude a deal where a transaction is well advanced;
• in order to provide further protection for investors where a SPAC's directors have a conflict of interest in relation to the target or any of its subsidiaries, the board of the SPAC should publish a statement that the proposed transaction is fair and reasonable as far as the public shareholders of the company are concerned; and
• in line with the focus on investor protection, the SPAC must provide investors with sufficient disclosure of key terms and risks throughout its life-cycle - from the time of listing to the announcement and completion of any acquisition.

With the new rules, the FCA is looking to balance high levels of investor protection against the creation of a more competitive SPAC regime capable of attracting international SPAC listings. Whilst the new rules seek to bring the UK more in line with other jurisdictions which have seen a flurry of SPAC listings, most notably the US and Amsterdam, it remains to be seen whether the rule changes will be effective in shifting the momentum away from Amsterdam, granted Euronext Amsterdam's recent popularity for such listings. In February 2022, London-based GP Bullhound, as sponsor to GP Bullhound Acquisition I SE, looked to Amsterdam rather than London for the €200 million listing of GP Bullhound Acquisition I SE – the first SPAC listing of 2022.

Dual class share structures, free float and minimum market capitalisation

In July 2021, the FCA published Consultation Paper 21/21 - Primary Markets Effectiveness Review which contained two main elements: (i) an open discussion seeking views on the functioning of the UK listing regime to enable the FCA to better understand the purpose and value of listing to issuers and investors; and (ii) a consultation on focused changes to the existing listing regime to remove barriers to listing as well as encourage private companies to consider listing at an earlier stage and to improve the accessibility of the FCA's rulebooks. In December 2021, the FCA published Policy Statement 21/22 - Primary Market Effectiveness Review: Feedback and final changes to the Listing Rules which included, amongst other things, the final rules relating to:

• a targeted form of dual class share structure within premium listing;
• a reduced free float requirement of 10 per cent; and
• an increased minimum market capitalisation threshold to £30 million for shares in companies other than funds.

The rules were effective as of 3 December 2021.

Dual class share structures

With a view to attracting companies in innovative growth sectors, especially founder-led companies, the Report recommended permitting companies with dual class share structures to list in the premium listing segment. The Kalifa Review also supported the introduction of dual class share structures on the premium listing segment, highlighting the availability of such structures on other major stock exchanges, such as the NYSE, NASDAQ, Euronext, Deutsche Börse, the Hong Kong Stock Exchange and the Singapore Stock Exchange. Dual class share structures, which allow founders to retain control and simultaneously enjoy the benefits of public ownership, are well-established in the US – Facebook and LinkedIn being notable examples of their employment.

Responding to the evolving nature of companies looking to list and the requirements of their founders, while imposing investor protection mechanisms, the FCA introduced new rules which facilitate a targeted form of dual class share structure on the premium listing segment - prior to the Listing Rule update, such structures were only permitted on the standard listing segment. Key features of this form of dual class share structure are as follows:

• time limit: the dual class share structure is capped to five years from the date of admission;
• conditions: the ratio of weighted voting rights to ordinary shares is limited to 20:1 and the weighted voting rights shares can only be held by company directors (or beneficiaries of a director's estate); and
• limitations in scope: the weighted voting rights can only be used in two limited scenarios, which are:
  • a vote on the removal of the holder of such shares as a director of the company; and
  • in the event of a change of control of the company, in relation to a vote on any matter.

The new rules seek to align London more closely with competitor jurisdictions and provide flexibility for companies that would not have previously had the option to list on the premium listing segment, including companies such as THG (formerly the Hut Group) which was required to list on the standard segment in 2020 as a result of its dual class share structure. Whilst the new rules might be well-received by founders, it will be interesting to see the market response to this additional flexibility. Dual class share structures have tended not to receive the backing of institutional investors in London as they are perceived as undermining the interests of minority shareholders. Interestingly, in October 2021, in an attempt to boost investor confidence, following a sharp drop in its share price, THG announced its intention to remove its dual class share structure.

Minimum market capitalisation

The FCA initially consulted on increasing the minimum market capitalisation for both the premium and standard segments from £700,000 to £50 million. However, following feedback to its consultation, the threshold was reduced to £30 million for commercial companies in both segments. With this significantly increased market capitalisation figure, the FCA intends to give investors greater trust and clarity about the types of company with shares admitted to different markets.

Free float reduction

The FCA has reduced the free float requirement for both standard and premium listings from 25 per cent to 10 per cent at listing and as a continuing obligation. The FCA has also removed its discretionary ability to modify the rule to accept a lower level. The previous free float threshold was seen as another barrier to listing - requiring companies at the time of flotation to structure an IPO in a way which accommodated a significant sell down or a significant new issuance. The revised threshold is closer to the approach adopted in other listing destinations where a fixed percentage is either not required or is applied in a more flexible manner. As previously highlighted by the FCA, the rationale for the free float requirement is liquidity - and liquidity may not in fact deteriorate at lower free floats.

Listing regime models

In terms of the wider discussion relating to possible models for a new listing regime structure, the FCA is continuing to consider these overarching reforms and is due to set out its proposed next steps over the course of the next few months.

FTSE indexation

In connection with the Listing Rule changes relating to free float, dual class share structures and minimum market capitalisation, the FTSE UK Index Series Ground Rules (the "Ground Rules"), which set basic admission requirements for the FTSE UK Index Series, have been updated further to the FTSE consultation on the eligibility criteria for inclusion in the FTSE UK Index Series. The changes took effect at the FTSE March quarterly review.

Free float

In respect of free float (defined by FTSE as the percentage of a company's shares that are considered to be freely available for public purchase), the minimum free float requirement for UK incorporated issuers has been reduced in the Ground Rules from 25 per cent to 10 per cent and, for non-UK incorporated issuers, the free float requirement has been reduced from greater than 50 per cent to a minimum of 25 per cent.

Dual class share structures

The Ground Rules now also accommodate dual class share structures within the voting rights test, which provides that a company must have more than five per cent of its voting rights in the hands of unrestricted shareholders. Where a company has implemented a dual class share structure in line with the updated Listing Rules, these shares are generally counted as one vote per share for the purpose of the voting rights test.

Market capitalisation

A security level minimum investable market capitalisation (broadly, full market capitalisation adjusted for free float restrictions and foreign ownership limits) requirement has been introduced pursuant to which, amongst other things, an investable market capitalisation of more than £50 million is required for non-constituents to be considered for inclusion and existing constituents with an investable market capitalisation of less than £30 million for two consecutive quarters will be removed.

While the updated Ground Rules do not replicate the FCA updates to the Listing Rules, they go some way towards underpinning their success. Indeed, in the Report, Lord Hill encouraged index providers to consider how their approach to certain index eligibility rules could be suitably adapted to respond to any FCA rule changes. FTSE indexation is a significant consideration for companies looking to list - among other things, it provides prestige and allows a company to benefit from passive investment by index tracking funds. In line with this, FTSE has confirmed that it will continue to monitor any developments to the UK listing regime, making further announcements in due course, if appropriate.

UK Secondary Capital Raising Review

In response to Lord Hill's recommendation to bring together an expert group to examine how further capital raising processes can be made more efficient, in October 2021, HM Treasury launched the UK Secondary Capital Raising Review. Areas under consideration include whether the overall duration of the secondary capital raising process can be reduced, whether new technology can be introduced to impact the process (ensuring shareholders can receive relevant information quickly and exercise their rights) and whether other fund-raising mechanisms, including the Australian 'RAPIDS' model, can influence the structures used in the UK. The UK Secondary Capital Raising Review is due to report its findings in the near future.

Prospectus Regime

In response to Lord Hill's recommendation for a fundamental overhaul of the prospectus regime, HM Treasury launched the UK Prospectus Regime Review in July 2021. On 1 March 2022, the Government published the Prospectus Regime Review Outcome in which it confirmed the policy approach it will take to reform the UK's prospectus regime, currently reflected in the UK Prospectus Regulation.

Set out below is an overview of the key proposed regime changes.

(i) Admissions to trading on UK regulated markets

Central to the regime changes is the decoupling of the regulation of public offers of securities and the regulation of admissions of securities to trading. Whilst the prospectus will be retained as an important part of the regulation of public offers of securities admitted to trading on UK regulated markets, the FCA will be given enhanced rule-making responsibilities in this sphere. Amongst other things, the enhanced responsibilities will allow the FCA to specify in its rulebook if and when a prospectus is required, including for further issuances, determine prospectus content requirements, decide whether - and, if so, in which circumstances – a prospectus must be reviewed and approved by the FCA prior to publication and address the manner and timing of publication. In connection with this, the Government will remove the criminal offence prohibiting requests for admission to trading on UK regulated markets without an FCA-approved prospectus first having been published.

(ii) A new architecture for public offerings of securities in the UK

Although the FCA will be able to require a prospectus for admissions to trading on UK regulated markets, prospectuses will not be a feature of the public offerings regime, other than in very limited circumstances. It is envisaged that there will be a general prohibition on public offerings of securities which will be subject to exemptions. The exemptions will be derived from those that currently apply under the UK Prospectus Regulation, but will be expanded to include, amongst others, offerings of securities which are, or will be, admitted to UK regulated markets, offerings to existing shareholders (subject to certain conditions, including that the offer is made pro-rata to a person's existing holding) and public offers from overseas. Retained exemptions will include the "Qualified Investors" and "150 persons" exemptions in addition to offers under employee share schemes, although the concept of "affiliated undertakings" will be clarified.

(iii) The "necessary information" test

Under the new regime, the Government will retain the existing statutory remedy for false, misleading or omitted information in respect of a prospectus allowing investors who can show they have sustained losses to seek compensation through the courts. In connection with this, the Government intends to retain a single statutory "necessary information" test as a basic standard of preparation for a prospectus, with some alterations, including a clarification that "necessary information" may vary according to whether an offer of securities relates to a first-time admission or a secondary issuance.

(iv) Facilitating forward-looking information

While retaining the existing statutory remedy for false, misleading or omitted information, the Government intends to raise the threshold for liability applying to certain categories of forward-looking information in prospectuses from the current "negligence" standard to a "recklessness" standard. As a safeguarding measure, such disclosures will be clearly labelled as forward-looking information to which the revised liability threshold applies. The FCA will also be given responsibility for specifying the categories of forward-looking information which will be subject to the new liability threshold.

(v) Junior markets

It is envisaged that offers of securities which are, or will be, admitted to trading on certain multilateral trading facilities ("MTFs") will be added to the public offering exemptions (see (ii) above). The Government also intends to introduce a mechanism by which admission documents published in accordance with the rules of the relevant MTFs are treated as a type of prospectus, in light of the proposed reform of liability for forward-looking information. Operators of MTFs will continue to establish admission criteria and rules for the facilities they run, subject to FCA rules and oversight.

(vi) Private companies

The Government aims to increase the capital raising options available to private (i.e. unlisted) companies and, in line with this, the Government intends to remove the current requirement for an FCA-approved prospectus to be published for offers over €8 million. Companies will instead be able to offer securities to the public provided the offer is made through a platform operated by a specifically authorised firm. In connection with this, the Government intends to create a new regulated activity covering the operation of an electronic platform for the public offering of securities, such as an equity crowdfunding platform. The FCA will then determine the detailed requirements to which such platforms will be subject.

(vii) Public offerings from overseas

A new regime of regulatory deference is envisaged for offers into the UK of securities listed on certain designated overseas stock markets, allowing offerings to be extended into the UK on the basis of offering documents prepared according to the rules of the relevant overseas jurisdiction and market. The FCA will not review or approve the offering documentation and will instead rely on an assessment of the effectiveness of the regulation of the relevant overseas market. There will, however, be appropriate powers for the FCA to intervene to protect UK investors in exceptional circumstances.

Next steps

Whilst the key objectives of this package of reforms – the move to a more agile, responsive and simplified regime, improving the quality of information provided to investors and facilitating wider participation in the ownership of public companies - are welcome, much of the detail of the proposals is still to be confirmed. In any event, the Government has stated that it will legislate to implement the revised prospectus regime when parliamentary time allows and, given the FCA's extended rule-making responsibilities, the suite of reforms will take full effect after the FCA has consulted on, and is ready to implement, its new rules. It may therefore be some time before these changes take effect.