One of the FCA’s many objectives is to ensure that markets function well and subsequently that the UK’s primary markets remain effective. This consultation paper (the “CP”) sets out the FCA’s proposals to enhance certain aspects of the Listing Rules sourcebook (the “Listing Rules”). This CP was published alongside a discussion paper which considers the broader market landscape and opportunities the FCA want to explore to encourage enhancements to the UK primary markets.
There are certain key changes that the FCA are proposing which listed firms should take note of in particular. These technical amendments include; clarifications to the premium listings requirements; a revision of the ‘profits test’ used for classifying transactions; and a new approach to disclosure requirements in relation to reverse takeovers.
Chapter 6 of the Listing Rules sets out the premium listing eligibility requirements an applicant has to meet in order to obtain a premium listing. Here, the FCA seek to update the existing requirements to provide additional guidance and re-draft the rules to provide clarity with the aim of clearly stating how these rules are applied in practice.
Currently, one of the eligibility requirements requires a company to show a three-year revenue earning track record, although there are ‘concessionary routes’ available to certain companies who are unable to fulfil this requirement. The FCA is proposing to add an additional ‘concessionary route’ to this requirement for certain property companies that are unable to meet this requirement. This would allow such companies to submit a property valuation report instead as a way of evaluating it against the eligibility requirement.
Annex 1, Chapter 10 of the Listing Rules enhances shareholder protections by imposing obligations on premium listed issuers to either provide certain disclosures to shareholders, or seek their approval, for large transactions which are outside the ordinary course of business. There are a number of ‘class tests’ which such listed issuers need to take in order to determine whether those obligations must be fulfilled in respect of their intended transaction. One such class test is a ‘profits test’ which historically has repeatedly caused stakeholders to raise concerns about it, as it often produces anomalous results. As a result, the FCA are proposing two changes to the profits test:
- where the result of a profits test is 25% or more, and all other class tests results are below 5%, premium listed companies will be permitted to disregard such anomalous results; and
- in certain limited circumstances, premium listed issuers may adjust profit figures used in the profits test, without first seeking FCA approval.
Without these amendments, the transaction would otherwise be classed as a class 1 or reverse takeover where in reality this would not be the case. This could lead to additional, and in some cases, unnecessary, burdens on the listed company.
Previously, the FCA’s approach to reverse takeovers could have been viewed as over-cautious. Currently, where a listed company provides insufficient information about the target company to the market, the FCA can use their powers to suspend the issuer’s listing. The reason for this was due to the assumption that the market would not be able to operate smoothly where such information is not provided about the target. However, as a result of the FCA’s own experience with reverse takeovers, and feedback from stakeholders (that some may be deterred from participating in such transactions where they run the risk of suspension), the FCA are proposing to amend the rules so that insufficient information is not a reason to suspect a firm. Instead, the FCA are comfortable that the market can still operate smoothly based on the information that the listed companies already make publicly available as part of their ongoing compliance obligations, in particular, the obligation to disclose inside information under the Market Abuse Regulations. Investors will benefit from this amendment because they will no longer be at risk of the listed company they are trading in being suspended. It should be noted however that this proposed change does not affect the FCA’s general power to suspend listing as per Listing Rule 5.1.1.
Benefits to firms
The FCA believes that the proposed changes will make the regulations clearer and easier to understand. They also believe they will also give firms more flexibility around their business decisions, i.e. in relation to reverse takeovers, they will no longer have to face a stark choice between pursuing a reserve takeover and avoiding a suspension of listing.
The FCA are looking to receive feedback and views on this CP by 14 May 2017, please click here to submit feedback, and they plan to publish its amended rules in a policy statement in the second half of 2017. Additionally, FCA have also confirmed that it plans to consult shortly on how to improve the information available in the IPO process.
For more information, and any guidance or advice on the Listing Rules, Cleveland & Co, your External in-house counsel, are here to help.