Changes have been made to the UK's Listing Rules with the aim of boosting growth and innovation on the UK's stock markets.
The Financial Conduct Authority (FCA) confirmed the following changes took effect on 3 December:
- allowing a targeted form of dual class share structure within the premium listing segment to encourage innovative, often founder-led companies onto public markets sooner and so broaden the listed investment landscape for investors in the UK;
- reducing the amount of shares an issuer is required to have in public hands (i.e. free float) from 25% to 10%; and
- increasing the minimum market capitalisation (MMC) threshold for both the premium and standard listing segments for shares in ordinary commercial companies from £700,000 to £30 million. The FCA have stated that raising the MMC will give investors greater trust and clarity about the types of company with shares admitted to different markets.
The changes were made in response to the recent UK Listing Review, which highlighted specific elements of the listing regime that acted as barriers to companies listing. The Review included some specific recommendations for improving the regime and the FCA launched a consultation based on these recommendations earlier in the year.
The FCA say the changes should reduce barriers and costs for companies considering listing, and therefore encourage more companies to become or stay listed in the UK.
Dual class share structures
These changes facilitate the use of dual class share structures within the premium segment in certain limited circumstances. The Listing Rules restrict votes on matters relevant to premium listing to holders of premium listed shares only. The changes introduce an exception that will enable holders of a second class of share, namely specified weighted voting rights shares, to also participate in the votes in some circumstances for a period of five years from the date of admission.
Limitations and controls have been placed on DCSS to ensure that high levels of corporate governance are maintained. These include:
- a maximum weighted voting ratio of 20:1;
- weighted voting shares may only be held by directors of the company or beneficiaries of such a director's estate; and
- weighted voted rights will only be available in two circumstances: (i) a vote on the removal of the holder as a director at any time and (ii) following a change of control, on any matter (to operate as a strong deterrent to a takeover).
Whilst a move in this direction is helpful we question whether these limited changes go far enough to attract the attention of high-tech and innovative companies away from the private equity arena and other competitor markets such as NASDAQ. Many of the international markets already permit the issue of dual-class shares, and often with wider control rights.
For both premium and standard listings the minimum level of free float has been reduced from 25% to 10% (both at listing and as a continuing obligation). The consultation had noted that data suggests a significant number of main global Initial Public Offerings (IPOs) take place at a free float of below 25% but very few at a free float of below 10%. The FCA believes that reducing the Listing Rules requirement to 10% will therefore allow most issuers flexibility to structure their IPOs in the way that suits them.
The guidance in the rules about applying for a modification has been removed, meaning that the FCA will not accept as a matter of course a free float lower than 10% at listing application or as compliance with the respective continuing obligation. If issuers are in breach of the 10% level, the FCA will no longer allow them to show they have liquidity via other means, but instead will ask that they present a plan for coming back into compliance with the rule as soon as possible.
The free float reduction is also helpful and will be attractive to founder and family holders wanting to retain a large percentage of a company on float. However this may come at the cost of low liquidity for companies with a smaller market capitalisation.
The minimum market capitalisation requirement for issuers (other than closed-ended investment funds or open-ended investment companies) seeking a premium or standard listing of shares has been increased from £700,000 to £30 million.
The requirement will only apply for new listings and will not apply as a continuing obligation for currently listed companies.
Transitional provisions have been provided as follows:
- applicants for admission to listing of shares who have made a completed submission to the FCA for an eligibility review as of 4pm on 2 December 2021 can apply for listing based on a MMC of £700,000 provided they have applied to list by 2 June 2023;
- shell companies, including Special Purpose Acquisition Companies (SPACs), that have existing listed shares or that have recently cancelled a listing and subsequently re-apply to list shares following a reverse takeover, can also apply for listing based on an MMC threshold of £700,000. This is provided they have completed submissions to the FCA for an eligibility review for listing and a prospectus review on or before 1 December 2023; and
- companies with existing classes of shares admitted to listing prior to 3 December 2021 and that continue to have at least one class of shares listed will be permitted to list additional classes of shares based on an MMC of £700,000, which is not time limited.
Although the FCA notes it is seeking to decrease barriers to listing, this change will certainly push potential smaller listings to other markets, such as AIM, AQSE, ASX and TSXv.
The text of the transitional provisions set out in the Listing Rules state that the provisions will not apply to applicants for admission where there has been a material change to their overall business proposition between the date of submission and the application for listing. The FCA have said it is not possible to set out an exhaustive list of these material changes, and that they will be assessed on a case by case basis. The same limitations have not however been applied to cash shells.
As part of its consultation, the FCA also asked for views on the overall structure of the UK listing regime and whether wider reforms could improve its longer-term effectiveness. The FCA intends to provide further feedback on these responses in the first half of 2022.
Changes to the rules of the AQSE Growth Market
On 7 December 2021 AQSE published its response to the consultation it ran on proposed changes to the rules governing the eligibility criteria and ongoing obligations applicable to SPACs on the Access segment of the AQSE Growth Market. In summary, the changes it announced are:
- the new term "enterprise company" will replace the SPAC definition within the rules.
- to be eligible for admission enterprise companies must:
- raise a minimum of £2 million by or at admission;
- have an expected market capitalisation of no more than twice its net tangible assets; and
- have a minimum free float of 25%.
- enterprise companies will have two years to implement their strategy.
The amended rulebook took effect on 8 December 2021.
If you would like any more information on these changes or would like to discuss their impact please contact Charles Bond or your usual Gowling WLG contact.