Capital Markets: UK Listing Regime Reform
Background
The UK government has been exploring a programme of wide-ranging reforms to the listing regime since 2020. This was driven in part by market feedback indicating that the UK listing regime was regarded as overly burdensome and deterring companies from listing in the UK. This process involved the initiation by the FCA of a consultation in July 2021 followed by the publication of a discussion paper in May 2022 outlining proposed structural reform of the UK listing regime. Following feedback the FCA has brought forward specific proposals (contained in consultation paper CP23/10 published on 3 May 2023) to reform and streamline the existing listing regime.
Overview
The proposals contained in CP23/10 are part of the government’s objectives to encourage a more diverse range of companies to list and grow on UK capital markets and to strengthen the UK’s position in global equity markets. The FCA’s proposals are sweeping and intended to create a more permissive, disclosure-based regime. The proposed changes include:
replacing the current two-tier structure of the Official List with a single equity segment for commercial companies
reduced eligibility criteria for companies seeking an IPO
simplified continuing obligations regime
removing some situations in which compulsory shareholder votes and approved circulars are required The FCA acknowledges that this refocusing will shift greater investment risk to investors
Summary
The following is a summary of the key changes outlined in CP23/10:
Single listing category:
replace the current standard and premium listing segments with a single unified segment for equity shares in commercial companies (ESCC)
disclosure rather than rules-based approach
Eligibility criteria:
removal of financial eligibility criteria concerning historical financial information, revenue earning track record, audited historical financial information and the requirement for a 'clean’ working capital statement
certain current core eligibility criteria and ongoing obligations to be retained e.g. regarding free-float and minimum market capitalisation
Controlling shareholders:
controlling shareholder regime continues but significantly modified. Mandatory requirement for a relationship agreement with such shareholders removed and replaced by a more flexible 'comply or explain' disclosure model
Dual class share structures:
more flexible approach than currently allowed e.g., permitting enhanced voting rights on all matters and at all times and extending the current sunset period for such share structures from 5 to 10 years
Class 1 Transactions:
announcement only required – removal of requirements for prior shareholder approval and approved circular. Shareholder vote and FCA-approved circular retained for reverse takeovers. No announcements required for transactions falling below Class 1 threshold
Related Party Transactions (RPTs)
smaller RPTs (<5% value): No requirement for announcement but disclosure under UK MAR
larger RPTs: No requirement for shareholder approval and circular. Announcement only with fair and reasonable statement by the Board supported by sponsor
Classification tests:
profits test to be removed; sponsors will have greater discretion to apply modifications (it should be borne in mind that theses tests will in future only determine whether an announcement is required)
Listing Principles:
the FCA proposes a single set of Listing Principles
Sponsor regime:
expanded to include all companies in the single segment. Role of the sponsor will largely mirror the sponsors’ role at IPO, with a reduced scope following admission
Independence and Control
modification of the current rules requiring a company to have an independent business and operational control over its main activities (to accommodate a range of business models and corporate structures)
Non-Equity Securities
The FCA plans to retain the existing listing regime for non-equity securities and shares issued by investment vehicles.
Shell companies/ SPACs
A new listing category for equity shares in shell companies - including special purpose acquisition companies - is proposed.
Investor Protections
The FCA proposes to retain requirements for companies listed on the ESCC category to obtain shareholder approval in a number of circumstances including:
Cancellation of listing – prior shareholder approval (75% majority) and FCA-approved circular to shareholders will continue to be required
Reverse takeovers – the new rules will continue to require prior shareholder approval and an FCA-approved circular
Pre-emption rights - shareholder approval will continue to be required for a non-pre-emptive issues at a discount of more than 10% and for share buybacks
Independent directors – election rules to be retained (separate approval by independent shareholders) • UK Corporate Governance Code - the existing Listing Rules for premium listed companies relating to the UKCG Code would be extended to all companies on the ESCC.
Timeline
The FCA intends to consult further on the detail of the proposed rules changes (which will include draft listing rules to implement its final policy position) in Autumn 2023. It is anticipated that the new rules will be implemented in Q1 2024.
Prospectus Regime Reform
Background
The Hill Review of the UK listing regime published in March 2021 also included recommendations for an overhaul of the prospectus regime. In July 2021 the government published an initial consultation on reforms to the rules governing the circumstances in which a prospectus should be published and its contents. The FCA has recently published a series of high-level engagement papers on the new prospectus and UK public offers regimes. The following is a summary of the matters on which the FCA sought views:
IPOs: the requirement for a prospectus on an IPO will remain and it will continue to need to contain sufficient detail to meet the necessary information test. The FCA seeks views on when exemptions to this requirement should apply, the required content and format of a prospectus in this context, and the responsibility for, and approval of, such a prospectus
Secondary issues: for existing listed issuers, a public offer will not require publication of a prospectus unless there is a clear need for one (to protect investors). The FCA asks whether there should be a threshold (set by reference to the percentage of the issuer’s existing share capital that the issuance represents) above which a prospectus would be required and what document (if any) should be required if/where a prospectus is not required
Protected forward-looking statements (PFLS): The FCA seeks views on how PFLS, which will be subject to the lower recklessness liability standard, should be defined. It also asks whether certain minimum criteria should be set for the production of PFLS, how they should be presented and labelled in prospectuses, and whether sustainability-related disclosures should be PFLS
IPOs/ secondary issues
The UK government has declared its intention for the UK Prospectus Regime to depart from its EU equivalent (and from which it derives). In particular the government proposes separate treatment for the regulation of public offers and admissions to trading. The government proposes to grant the FCA discretion to determine whether a prospectus is needed on admission to trading and indicated that a prospectus may not be necessary on every admission e.g., a further issue of shares by a listed issuer. The rationale being that the UK markets require material information to be disclosed on a regular basis.
Public Offers
The government proposes to narrow the scope of a public offer by introducing an exemption for offers to existing shareholders. This will have the effect of removing from the public offering regime rights issues and open offers.
Prospectus Exemptions
The government has decided not to change the threshold exemption for offers to 150 people or fewer. Prospectus Contents Currently the content and format requirements for a Prospectus are contained substantially in the UK Prospectus Regulation and UK Prospectus Delegated Regulation. The government has expressed concern at the complexity of the current regime and is proposing a shift to a more dynamic and agile regime allowing the FCA discretion to set rules. The UK Prospectus Regulation will be incorporated within the FCA Handbook. Nevertheless, the government proposes the retention of an overall statutory standard based on the existing necessary information test.
Approval
The government proposes to give the FCA discretion to establish its own policy concerning the approval or otherwise of UK prospectuses. AIM/ Acquis The AIM and Acquis Growth markets are multilateral trading facilities (rather than regulated markets) and as such subject to regulations imposed by the London Stock Exchange rather than the FCA. Where securities are being admitted to these markets no prospectus is required unless there is an offer to the public. The government plans to exempt these markets altogether from the offer to the public test meaning a prospectus would no longer be required for an IPO on one of those markets i.e., where shares are offered to the public.
Private Companies / Crowdfunding
The government has previously (Prospectus Regime Review Outcome published in March 2022) declared its desire to increase the capital raising options available to private unlisted companies. The government intends to remove the current requirement for an FCA-approved prospectus to be published where an offer exceeds €8m and instead allow for securities to be offered to the public by private companies provided that the offer is made via a regulated platform operated by an authorised firm. This means the creation of a new regulated activity governing the operation of an electronic platform for the public offering of securities (e.g., an equity crowdfunding platform). The FCA will determine the requirements of such platforms.
Overseas Companies
At present an overseas company wishing to make an offer of securities into the UK must publish an FCA-approved UK-law compliant prospectus. The government proposes to develop a new regime of regulatory deference in place of the current equivalence regime (contained in Articles 29 and 30 of the UK Prospectus Regulation). This means that companies whose securities are listed on a non-UK stock market will be permitted to extend an offer of those securities to the public in the UK on the basis of offering documents prepared according to the rules of the relevant local market and jurisdiction. The FCA would not review or approve those documents rather, reliance will be placed on an assessment of overall effectiveness of the relevant overseas market. However the FCA will be granted reserve powers to intervene and close an offer into the UK where it is satisfied that completion would be detrimental to the interests of UK investors.
Timeline
Responses to the engagement papers are required by 29 September 2023. The FCA plans to consult on specific rule proposals in 2024.
Brexit
Retained EU Law
In order to avoid leaving gaps in the UK legal system when the UK withdrew from the EU, the body of EU law that applied to the UK at the end of the transition period (31 December 2020) was imported into UK law. This body of law is known as retained EU law. On 22 September 2022, the government introduced the Retained EU Law (Revocation and Reform) Bill (REUL Bill) which proposed the repeal of all retained EU law on 31 December 2023, unless specifically preserved and incorporated into domestic law (the “sunset provision”).
On 10 May 2023, following months of pressure from all corners of industry (both within the UK and EU), the UK government proposed an amendment to the REUL Bill scrapping the sunset provision and replacing it with a list of the specific retained EU law it intends to revoke at the end of 2023. The government has published a “Retained EU Law Dashboard” containing details of retained EU law identified for revocation and which will be updated on a quarterly basis.
Beyond financial services - and that legislation specified in the Dashboard - there remains considerable uncertainty in the UK about the legislative landscape beyond 2023. The government has also published a policy paper which sets out some more detailed proposals for post-Brexit reform largely focused on employment law issues including:
simplifying the rules that apply under the TUPE Regulations when a business transfers to a new owner
limiting the length of non-compete clauses in employment contracts to three months
reducing the rules on recording working hours and other administrative requirements under the Working Time Regulations.
The House of Commons is scheduled to consider the proposed House of Lords amendments on 12 June 2023.
M&A
NSIA Update
The National Security and Investment Act 2021 (NSI Act) came into force in January 2022 and gave the UK government power to scrutinise a wide range of transactions on national security grounds making mandatory the notification of relevant transactions in 17 specified sectors (see our detailed briefing on the regime for more detail). On 27 April 2023 the government published updated guidance on the NSI Act. This is the second guidance issued by the government; it updates and incorporates the first guidance (published in July 2022) and provides further guidance in a number of areas including:
the government’s powers to provide financial assistance to businesses and other parties affected by a final order under the NSI Act
in the case of the 17 specified sectors where notification is mandatory, further detail on how to engage with government if there is significant uncertainty about whether an acquisition is notifiable
the timing of a notification (including when to notify that an acquisition is being contemplated).
Company Law Reform
Economic Crime and Corporate Transparency Bill
Background
The Bill was published on 22 September 2022. It is the second part of a legislative package aimed at preventing abuse of UK corporate structures and tackling economic crime. It follows on from the Economic Crime (Transparency and Enforcement) Act 2022 which provides for the creation and maintenance of a register of overseas entities by Companies House and contains requirements for overseas entities owning UK property to apply for registration and provide information about their beneficial owners. According to the UK government the Bill has 3 key objectives:
Prevent organised criminals, fraudsters, kleptocrats and terrorists from using companies and other corporate entities to abuse the UK’s open economy
Strengthen the UK's broader response to economic crime by giving law enforcement new powers to seize cryptoassets and enabling businesses in the financial sector to share information more effectively to prevent and detect economic crime
Support enterprise by enabling Companies House to deliver a better service to improve the reliability of its data which will help inform business transactions and lending decisions across the economy
The effect of the Bill will be to amend and include new provisions in the Companies Act 2006 and related legislation.
Summary
The principal features of the Bill include:
broader powers for the Registrar of Companies enabling it to become a more active gatekeeper over company creation and custodian of more reliable data concerning companies and other UK registered entities. The Bill creates a number of objectives for the Registrar with the underlying intention being the maintenance of the integrity of the registers kept at Companies House in relation to a particular company
enhanced investigative and enforcement powers to Companies House enabling cross-checking of data with other public and private sector bodies. The Bill intends to make it easier for businesses in regulated sectors to share customer information with each other for the purposes of preventing, investigating, and detecting economic crime
identity verification requirements for all new and existing registered company directors, People with Significant Control and those delivering documents to Companies House
greater protection to personal information provided to Companies House limiting opportunities for fraud
a new corporate criminal offence for failure to prevent fraud and false accounting offences committed by employees or agents (see below)
powers to quickly and more easily seize and recover cryptoassets.
Failure to prevent fraud
Under the proposed new offence, an in scope organisation will be strictly liable (i.e. it will not be necessary to prove awareness on the part of the organisation) where an employee or agent commits a specified fraud or false accounting offence under UK law with intent to benefit the organisation, or another person to whom they provide services on the organisation's behalf. It will be a defence for the organisation to prove that it had in place reasonable fraud prevention procedures at the relevant time as were reasonable or that it was not reasonable to expect it to have prevention procedures in place. The government will publish guidance on the nature of reasonable procedures to prevent fraud before the new offence comes into force.
The offence will only apply to large organisations which are defined as corporates and partnerships who meet 2 of the following criteria in the year that proceeds the year of the fraud offence: more than 250 employees; more than £36 million turnover; more than £18 million in total assets.
Although the Bill is silent as to the jurisdictional scope of the offence, the government has indicated that if an employee commits a fraud under UK law, or targeting UK victims, the employer could be prosecuted even if the organisation (and the employee) are not based or incorporated in the UK. The maximum penalty on conviction will be an unlimited fine.
Timeline
The Bill completed its committee stage in the House of Lords on 11 May 2023 and is expected to receive Royal Assent before the Parliamentary recess in July.
Private Equity & Venture Capital
BVCA Model Documents
Background
Earlier this year the British Private Equity and Venture Capital Association (BVCA), the industry body for the private equity and venture capital industry, published revised versions of its model documents for early stage investments. The documents were last reviewed in 2017. The primary function of the documents is to promote industry standard CoCo Briefing 08 June 2023 legal documentation to facilitate efficient transaction execution. The model documents provide the template for most corporate arrangements involving institutional growth capital backed UK private enterprises. The BVCA consulted broadly with practitioners and investors throughout the industry and the documentation reflects changes and trends in market practice for Series A and similar early stage investments. The documents are intended to strike a balance between the interests of founders, investees and investors. According to those involved in the process the changes were influenced by a number of trends including a convergence with US market practice resulting from the increased amount of US capital in the UK system, adapting the documents for use in EIS/ VCT transactions and changes in UK M&A deal structures again influenced by US market practice.
Summary of Changes
The principal changes are summarised below:
Structure
The subscription agreement and shareholders’ agreement are now separate documents. The subscription agreement deals substantially with the mechanics of the investment and warranties.
Warranties
The warranties are given solely by the investee (not the founders) and have been extended to include matters such as ESG, the revised national security regime and VCT/ EIS related matters. The warranty limitations have been altered to remove any de minimis exclusion (i.e., minimum monetary threshold which must be reached before a claim can be brought) and impose a time limit of 18 months for bringing claims. This is a sensible approach to issues which frequently assume a disproportionate of negotiation time. That said seed investments are likely to require some comfort from founders.
Disclosure
The disclosure regime has been altered such that the blanket disclosure of data room contents and due diligence replies will not be accepted. This is unlikely to be controversial for early stage businesses.
Governance Undertakings
The scope of governance undertakings in the Shareholders Agreement has been extended to include the requirement for an investee to implement policies on workplace behaviour, climate and diversity as well as a sustainability plan. In practice this is likely to be transaction and sector specific with different investors having their own “house” approach to a number of these matters.
IPO/Sale
The shareholders’ agreement omits the previously established principle exempting investors from giving warranties on an exit. Again in practice many investors are likely to have hard rules on this.
Under the articles all shareholders are subject to a maximum 180 day lock-up post- IPO. The likelihood is that most brokers will require a significantly longer period from senior management.
Vesting
Leaver provisions have been modified:
Bad Leavers lose all their shares (vested or otherwise)
Good leavers lose unvested shares
In the case of early leavers - a founder leaving the business in the first 12 months – the document includes an option for those leavers to lose all their shares whether or not a good leaver
The concept of a “Bad Leaver” has been narrowed to matters considered to be particularly harmful to the investee e.g. breaches of restrictive covenants. Voluntary resignation is retained but as an option
Vesting occurs over 48 months (a provision which is likely to be subject to specific negotiation in each case)
Founder Directors
A founder’s right to appoint a director terminates upon becoming a leaver.
Pre-Emption
These are restricted to major investors. This is a sensible step from the investee company’s perspective as it enables a more efficient fund-raising process.
Drag-Along
Dragged shareholders are now required to participate in all sell-side obligations (previously the documentation obliged them only to give title and capacity warranties) with certain exceptions e.g., business warranties. This means that dragged shareholders will amongst other things be subject to price adjustment mechanisms and removes the perverse preferential treatment previously enjoyed by dragged shareholders.
Articles
The investee’s shareholder base typically expands exponentially at each fund raise. Each finance round will usually require amendments to the articles of association which in turn requires the support of 75% of all voting shareholders. In practice this means that a minority of 25% plus one can block a financing round. The new documentation requires existing shareholders to approve future amendments to the articles sanctioned by the board, “investor majority” and a simple majority of the equity shareholders. This change is another example of the convergence of the documentation with its US equivalent.
Class Rights
Another typical albeit indirect consequence of a new finance round is the variation of the rights attached to a particular existing class(es) of shares. The new articles facilitate this process by requiring only the written consent of a majority of the class (rather than 75%).
Holding Company
As the market has continued to evolve and become increasingly sophisticated so the need to interpose a new holding company into an investee group structure has increased (e.g., for tax structuring or pre-IPO). The documentation now provides for these structures to be implemented with the approval of the board and investor majority.
The BVCA also announced its intention to publish further model documents in due course.
Employee Share Schemes
SAYE/ SIPs
The government has announced its intentions to seek views on an overhaul of employee share ownership schemes. Specifically, the treasury is reviewing the Save As You Earn and Share Incentive Plan schemes being the government’s non-discretionary (all employee) tax advantaged share schemes. The government also offers 2 discretionary tax-advantaged employee share schemes namely Enterprise Management Incentives and Company Share Option Plans.
Employee share ownership is supported across the political spectrum as a means for employers to motivate and retain staff, align the interests of employer and employee and help staff save.
SAYE and SIP schemes enjoy generous tax breaks but each is subject to strict rules. SAYE schemes allow a company to grant to eligible employees an option to acquire shares in the company at a fixed price. That price can be discounted by up to 20% of the market value. SIPs allow companies to help eligible employees acquire shares in the company; the shares are held in an employee benefit trust on behalf of participating employees and usually must be kept there for 5 years to secure the full tax advantages.
The review forms part of the government’s objective of growing the economy and sharing prosperity particularly among lower paid workers. There has been concern at the usage of these schemes and with a view to improving their attractiveness the government is considering simplifying the rules and improving their flexibility.
The government has invited responses by 25 August 2023.
