UK listing regime reforms: impact on standard listed issuers

Background

Following the FCA's May 2023 consultation on major reforms to streamline and enhance the UK listing regime and its December 2023 publication of detailed proposals, the FCA has now published a consolidated draft UK Listing Rules instrument (UKLR) to replace the current Listing Rules, together with proposed changes to its guidance.

Core to the proposals is the creation of a single listing category for equity shares in commercial companies (ESCC), with a deregulatory shift to a more disclosure-based regime.  While premium listed issuers will automatically move to the ESCC category once the new regime goes live, existing standard listed issuers will be mapped to the equity shares (transition) category (Transition Category) unless they are eligible for admission to a different category such as the shell companies category or the international secondary listing category. In this blog, we explain how these reforms will affect standard listed issuers. 

1. What rules will apply to companies mapped to the Transition Category?

Chapter 22 of the new Listing Rules (UKLR 22) will apply to companies with a listing in the Transition Category, replicating the continuing obligations under Chapter 14 of the existing Listing Rules for standard listed issuers.  It is designed to maintain the status quo for existing standard listed issuers until they are ready to transfer to the ESCC category.

2. When will the changes take effect?

The UKLR are expected to take effect early in the second half of 2024, two weeks after their publication. The exact date is to be announced by the FCA. 
The process for mapping existing standard listed issuers into the new UKLR categories will be based on FCA analysis of the Official List.  From mid-May 2024 onwards, the FCA is expected to notify issuers of the category that their securities will be mapped to.  Issuers who think they have been incorrectly allocated will have four weeks to respond.

3. Do companies in the Transition Category need to appoint a sponsor?

There is no requirement to appoint a sponsor in relation to any continuing obligations of companies in the Transition Category.  A sponsor will be required only when a company in the Transition Category applies to transfer to another listing category.

4. How long will companies in the Transition Category have before they have to transfer out?

The existence of Transition Category does not have a fixed end date so standard listed issuers will be able to stay in this category without additional cost and have sufficient time to consider whether and when to make a move.

However, as the Transition Category will be closed to new entrants, the number of issuers is expected to dwindle over time due to transfer to other categories or exit events (eg listing on an alternative market such as AIM or Acquis).  The FCA will keep the Transition Category under review and may wind it down in the medium term after further consultation.   

5. Can companies in the Transition Category undertaking a reverse takeover return to the same category?

Companies in the Transition Category will not be eligible for re-admission to the category on completion of a reverse takeover, regardless of whether the target is also listed in the Transition Category.  To maintain a UK listing, they will need to cancel their listing and re-apply to list on an open category such as the ESCC.  If they do not believe that they can satisfy the ESCC eligibility requirements, they may alternatively seek to admit their securities onto another market or de-list.  

6. Can standard listed issuers transfer to the ESCC category?

Companies mapped to the Transition Category will be encouraged to utilise a modified transfer process (comprising a targeted eligibility assessment and a sponsor appointment) to transfer to the ESCC category provided that: 

• Their shares have been admitted to the Official List for at least 18 months continuously (including the publication of at least one annual financial report following admission).
• They do not have any securities currently or in the last 18 months suspended from listing.
• They have complied with their obligations under the listing rules and corporate governance rules as well as disclosure and notification requirements in the last 18 months.
• They are not undergoing or have not undergone in the last 18 months a significant change to their business which includes a reverse takeover.

7. What are the requirements for using the modified transfer process?

Eligibility assessment 

Unlike new listing applications, the modified process will not require an assessment of an issuer’s ability to comply with all ESCC eligibility requirements.  Instead, it will involve an assessment of a limited number of requirements which are additional to those in Chapter 14 of the existing Listing Rules for standard listing, particularly:

• Degree of business control:
  • The discretion of the board to make strategic decisions has not been limited or transferred to a person outside the issuer's group.
  • The board has the capability to act on key strategic matters in the absence of a recommendation from a person outside the issuer's group.
• Controlling shareholder: Where there is a controlling shareholder, the issuer must demonstrate that it can carry on its business independently from its controlling shareholder and that it has a written and legally binding agreement with that controlling shareholder.
• Constitutional arrangements: The issuer's constitution must allow compliance with the UKLR, requiring voting on matters that must be decided by shareholders and, where there is a controlling shareholder, the election and re-election of independent directors. 

Sponsor appointment

The modified process requires the appointment of a sponsor.  In contrast to a new listing application where a broader assessment is performed, sponsors in the modified process focus on the continuing obligations which are additional to those of existing standard listed issuers.  

The sponsor will ensure that the directors understand their additional responsibilities and obligations in relation to the ESCC category and will be required to confirm that:

• The issuer has adequate procedures in place to: 
  • Identify potential transactions that may constitute significant transactions, reverse takeovers or related party transactions and understand its obligations in these circumstances.
  • Comply with additional annual reporting requirements on a comply-or-explain basis against the UK Corporate Governance Code.
• It has not identified any adverse information leading to the conclusion that the issuer would be unable to comply with its obligations under the UKLR and Disclosure Guidance and Transparency Rules.

Announcement

Shareholder approval will not be required for transfer to the ESCC category.  However, the issuer must make an announcement via a regulatory information service to explain the reasons for and effect of the transfer.  

8. What happens if the eligibility requirements for the modified process are not met?

Companies will still be able to transfer to the ESCC category by complying with the requirements of a full transfer process, which will be in line with the current premium listing application process but subject to more flexible criteria, eg three-year historical financial information, revenue track record and clean working capital statement will not be required.

9. How soon can companies transfer to the ESCC category? 

Once the UKLR come into force, companies will be able to use the modified transfer process if their shares have been admitted to the Official List for at least 18 months continuously without significant change to their business.  

However, companies which list on the standard segment or undergo a reverse takeover immediately prior to the UKLR coming into effect will have to wait for at least 18 months, or satisfy the full transfer requirements, to transfer to the ESCC category.

10. What will happen after transfer?

Issuers in the ESCC category will need to comply with additional ongoing obligations including requirements for sponsor opinions for related party transactions and announcements for significant transactions.  They will need to report against the UK Corporate Governance Code and will no longer be permitted to adopt alternatives such as the Quoted Companies Alliance Corporate Governance Code.

The sponsor regime, which does not apply to the standard segment, will apply to:

• Significant increases in the issuer’s share capital involving an FCA-approved prospectus, such as equity raises.
• Reverse takeovers by the issuer.
• Related party transactions, which will require fair and reasonable opinions from the sponsor.

As per the provisional changes to the FTSE UK Index Series rules published in March 2024, issuers in the ESCC category are expected to be eligible for inclusion in the FTSE UK Index Series.  This eligibility could be critical to the overall appeal of transferring to the ESCC category, as it could enhance issuers' brands and differentiates the ESCC category from similar listings that may be available in other markets. 

Conclusion

Although more regulatory requirements will apply after transfer to the new ESCC category, they are less onerous than those for premium listed issuers under the current regime and should not prove unduly burdensome.  

Transfer to the ESCC category could provide the benefit of index inclusion, which may be appealing to standard listed issuers who have longed for a superior brand.  The upcoming changes to the UK listing regime offer standard listed issuers an opportunity for reclassification.