The Financial Services Authority ("FSA")1 recently launched a consultation paper proposing a number of amendments to the Listing Rules ("LR").2 The changes proposed by the FSA, the majority of which are technical in nature but which aim to take account of recent developments in market practices, focus on the following areas:
- Reverse takeovers (LR Chapter 5);
- Sponsors (LR Chapter 8);
- Transactions (LR Chapters 10, 11, 12 and 15);
- Financial information (LR Chapters 6 and 13); and
- Externally managed companies (LR Chapter 5, DTR 3.1 and PR 5.5.3).
The proposed amendments include an element of consolidation: all relevant material (including Technical Notes,3 some of which require updating) will be incorporated in the formal body of the LR. A number of the amendments also affect the Disclosure and Transparency Rules ("DTR") and the Prospectus Rules ("PR").
Reverse Takeovers (LR Chapter 5)
The proposals clarify the FSA's approach to reverse takeovers and which transactions are caught by the reverse takeover regime. In short, a reverse takeover under the LR is where a listed
issuer acquires a target where a percentage ratio (as calculated under the LR) is 100% or more (so, essentially, where the target is larger than the listed issuer), or which would result in a fundamental change to the business of the issuer. The proposals will consolidate the FSA's approach currently set out in LR 5 and 10 and the related LR Technical Note into a single section of the LR.
The concern is that reverse takeovers may be used as a 'back door' to secure a listing of a business which would otherwise be ineligible for listing (including an already listed company obtaining a premium listing). When a listed issuer completes a reverse takeover, its shares are usually cancelled from listing, and the newly-enlarged group must prepare a prospectus and satisfy the relevant eligibility requirements in order for its shares to be listed for trading. An acquisition by a listed issuer of another listed issuer's shares is not currently treated as a reverse takeover, and is exempt from the cancellation of shares from listing. The FSA proposes to tighten the exemption, which will apply only to the acquisition by a listed issuer of another issuer which is listed within the same listing category (that is, premium or standard listing).
However, in return, where the reverse takeover regime applies, the FSA has formally confirmed its practice – namely, to apply the rule proportionately. For example, the intention is to reduce some of the information requirements to avoid suspension, not always requiring a prospectus and modifying some of the financial information requirements.
The FSA will require issuers to contact the FSA as soon as possible after a reverse takeover is agreed or in contemplation, in order to consider whether suspension of the issuer's listing is appropriate. For issuers with premium listings, consistent with a theme of the proposed changes (see below), the FSA proposes that the issuer's sponsor should communicate with the FSA on behalf of the issuer. Further details are set out below.
Sponsors (LR Chapter 8)
The FSA proposes to increase the number of situations where the sponsor of an issuer (not the issuer itself) should communicate with the FSA. Consequently, the FSA also proposes to increase the number of situations where an issuer is required to appoint a sponsor. The FSA's proposals clarify its expectations of sponsors when communicating with the UKLA whilst performing sponsor functions, through:
- applying the Principles for Sponsors to all communications between the FSA and the sponsor of an issuer (not just communications where the sponsor is providing a 'sponsor service', which is the current position);
- granting the FSA the power to request explanations or confirmations from sponsors in connection with sponsor services, within such time period as the FSA reasonably requires to ensure the LR are being complied with; and
- obliging sponsors to take all reasonable steps to ensure all communications with the FSA are, and information it provides to the FSA is, "to the best of its knowledge and belief accurate and complete in all material respects".
There is no doubt that the effect of these changes will increase both: the number of occasions when an issuer must appoint a sponsor; and the role, accountability and compliance burden of a sponsor. This ranges from the extension of the principle of honesty and integrity in performing all sponsor services, to notifying any breach of the LR/DTR, through to a number of specific additional responsibilities.
Transactions (LR Chapters 10, 11, 12 and 15)
The majority of the proposed amendments in respect of transactions governed by the LR implement what is already existing practice, following the LR Technical Note. The proposals are summarised below according to LR.
LR10: Significant Transactions (Premium Listing)
The FSA proposes to remove the references to 'revenue nature' currently included in the definitions of 'transaction' for significant transactions (in LR 10.1.3R(3)) and 'related party transaction' (in LR 11.1.5R). It has been noted that use of the term 'revenue nature' is not particularly helpful in either definition.
The FSA proposes to remove notification requirements for class 3 transactions, because the DTR already requires issuers to disclose price-sensitive information.
The FSA proposes changes to clarify the UKLA's approach to break fee arrangements: it notes shareholders should retain control over the ability of listed issuers to enter into break fee arrangements, because such arrangements could result in cost to the issuer without it receiving any measurable benefit. The term 'break fee arrangement' will replace the term 'break fee', as such arrangements may provide for something other than a simple fee, and/or for payment of more than a single amount. The purpose served by the arrangement and whether the listed issuer must make payment to the other party to the failed transaction are important when determining whether an arrangement is a break fee arrangement. If the purpose of the arrangement is that a compensatory sum becomes payable by a listed issuer to another party upon the failure of a proposed transaction, and there is no independent substantive commercial rationale for the arrangement (a 'money for nothing' element), then it will be deemed to be a break fee arrangement. The FSA proposes new guidance as to the type of arrangements which will be considered to be break fee arrangements, and those that might have an independent substantive commercial rationale.
Where a significant change or significant new matter arises following the publication of a circular but before the shareholder meeting convened to seek shareholder approval has been held, the issuer will be required to send a further circular to shareholders including details of the change or new matter, to ensure shareholders have correct and current information in order to make a properly informed decision. It is proposed that any further circular be sent to shareholders at least seven days before the shareholder meeting, but if this is not possible, the meeting may need to be adjourned.
Where a material change to a transaction arises after shareholder approval has been obtained but prior to completion of the approved transaction, the issuer must seek fresh approval of the transaction from its shareholders. The FSA proposes to extend this requirement to also apply to related party transactions (governed by LR 11).
LR11: Related Party Transactions (Premium Listing)
The FSA proposes that requirements governing related party transactions will not apply to any transaction undertaken in the ordinary course of business, not just those transactions in the ordinary course of business which are of a revenue nature, which is the current position.
The FSA proposes to amend the definition of 'associate' to include partnerships (which include limited partnerships and limited liability partnerships) in which a related party has a significant interest. This is consistent with the position in the LR Technical Note.
The UKLA intends the related party transaction rules in LR 11 not to apply to directors' 'loans' which function in a similar manner to an indemnity granted to directors. The FSA invites views to be submitted regarding whether significant transaction rules in LR 10 should apply to loans granted by an issuer to directors for purposes set out in sections 204 to 206 of Companies Act 2006 (expenditure on company business, defending proceedings or in connection with a regulatory investigation). The current approach is that a loan to a director for which a relevant percentage ratio is 25% or more will be subject to shareholder approval, and so shareholders are able to control whether a listed issuer can enter into such loans.
LR12: Dealing in Treasury Shares (Premium Listing)
An issuer must announce to the market when it deals in (i.e. a sale for cash, transfer pursuant to an employees' share scheme or cancellation of) any of its treasury shares. The FSA proposes to introduce a threshold, so that an announcement does not need to be made in respect of every such dealing but, rather, only where such dealings are in excess of 0.5% of the issuer's issued share capital. This amendment would provide clarity to issuers and their advisors, removing a significant administrative burden from and reduce compliance costs for listed issuers.
LR13: Contents of Circulars (Premium Listing)
The FSA proposes to require issuers to post circulars to their shareholders as soon as the circular has been approved. Where, following the publication by an issuer of a circular to its shareholders but prior to the shareholder meeting, there is a material change to the terms of the proposed transaction, any supplementary circular must be sent to shareholders no later than seven days before the date of a meeting in order to allow shareholders sufficient time for review and consideration.
A class 1 circular sent to shareholders must include a declaration made by the issuer's directors taking responsibility for the circular's contents. It is proposed that the declaration required by the LR refer to both the issuer and its directors, so it becomes consistent with the approach of the PR.
The FSA proposes removing the requirement for class 1 disclosures to be included within a related party circular published in respect of a proposed related party transaction where any percentage ratio is 25% or more, as information currently required to be disclosed is often not relevant to the proposed transaction, and commonly issuers request waiver of such disclosure requirements. This would provide clarity to issuers and their advisors, and reduce compliance costs for listed issuers associated with liaising with the UKLA regarding the circular contents.
The FSA notes class 1 circulars commonly contain large numbers of risk factors, which may cloud shareholders' understanding of those risks materially relevant to the proposed transaction for which their approval is sought. The FSA proposes to reinforce that only those risk factors material to the proposed transaction or those new or changed risks to the group as a consequence of the proposed transaction should be included in the circular. This proposal would reduce compliance costs for listed issuers, as fewer risk factors will be subject to UKLA review.
Financial Information (LR Chapters 6 and 13)
The proposed amendments to the LR mainly clarify the FSA's approach, and update the LR to reflect market practice. The proposed amendments focus on the financial information required when assessing a company's eligibility for a premium listing, to be included in a circular sent by a premium listed issuer for approval of a proposed class 1 transaction.
Externally Managed Companies (LR Chapter 5, DTR 3.1 and PR 5.5.3)
An 'externally managed company' is a cash-rich listed issuer with few or no assets, which has been incorporated to acquire and transform target businesses to create value for that issuer. The management of such issuers is outsourced to advisory firms and the directors of the issuer usually consist of non-executive directors, with the executive management function provided by an offshore advisory firm (often, these cash-shells are referred to as 'special purpose acquisition vehicles' – the FSA prefers its term, in order to highlight the devolved management). The FSA outlines transparency and governance concerns: the externally managed company structure impacts on the ability of the issuer's shareholders to hold the management of the issuer to account. The proposed amendments aim to strengthen the reputation of shareholder protection provided by the premium listing label.
The FSA proposes extending the application of the PR and DTR to advisory firms of externally managed companies, meaning that:
- the advisory firm would become liable for prospectuses published by the issuer, and become subject to disclosure of share dealings in the issuer's shares pursuant to the DTR;
- the definition of a 'Person Discharging Managerial Responsibility' would not be restricted to the issuer's directors or those directly employed by an issuer; and
- a person with regular access to inside information and the power to make managerial decisions affecting business prospects of the issuer may be deemed to be a 'senior executive' of the issuer, notwithstanding they do not have an employment or service contract with the issuer.
Wider View
The FSA also proposes that issuers with such corporate management structures cannot be premium listed. Externally managed companies could not apply to become premium listed, and those with such a structure already with premium listings must alter their management structure to one which is more conventional, or have their Official Listing redesignated as a standard listing.
The consultation paper also invites views on whether the premium listing, as governed by the LR, remains a valid benchmark of high standards for listed issuers, and whether the LR could be further enhanced in order to strengthen shareholder protections and overall benefits which they currently provide. The FSA notes the LR form only part of the overall corporate governance architecture: the interaction between the LR and the UK Corporate Governance Code (which is published by, and responsibility for which lies with, the Financial Reporting Council) is noted, in that the LR require a 'comply or explain' statement in an issuer's annual financial report. The consultation paper suggests consideration would be given to enhancing veto rights of minority shareholder over key resolutions such as the appointment of directors, or including additional restrictions on issuers with controlling shareholders to ensure that such issuers can conduct business independently of their controlling shareholders or introducing a new free float requirement effectively allowing minority shareholders to determine the issuer's governance arrangements.
Unlike the other changes, the FSA is merely inviting 'debate' on this topic. If responses are offered to the FSA on this topic, it will consider developing certain options or proposals for discussion in a further consultation later in the year.
Conclusion
Whilst the majority of the amendments proposed will implement recent changes to market practice, the proposed amendments, if implemented, would also have significant consequences for issuers, sponsors and the advisors of external managed companies.
Reponses to the consultation are due by 26 April 2012, and the FSA intends to publish its feedback and policy statement in the summer of this year, with implementation of the rules coming into effect shortly afterwards.
Footnotes
1 The FSA does so in its capacity as the UK Listing Authority ("UKLA").
2 Available from: http://www.fsa.gov.uk/library/policy/cp/2012/12-02.shtml.
3 Available from: http://www.fsa.gov.uk/doing/ukla/ukla_publications.
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