All change and more change?

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In January of this year the FSA consulted on proposed changes to the Listing Rules, Prospectus Rules and the DTRs (previous alert). The FSA has recently published Handbook Notice 123, confirming the changes made (or to be made) to the Listing Rules, together with a feedback statement and a further consultation (CP12/25) on proposed changes ‘Enhancing the effectiveness of the Listing Regime’.

Changes to the Listing Rules

Looking first at the changes which have been (or shortly will be) made to the Listing Rules, these generally reflect the original proposals, although certain revisions have been made.  The key ones are:

  • Sponsors - the FSA has made it clear that a sponsor would only be required where there was an application for admission of equity shares to a premium listing (and not where a premium listed company wishes to list standard equity shares). The definition of ‘sponsor service’ has been amended to avoid any implication that a sponsor is obliged to provide a sponsor service when requested, but had not yet agreed or been appointed to do so. The new rules relating to sponsors will apply from 31 December 2012.
  • Reverse Takeovers - the definition of what constitutes a ‘reverse takeover’ has been clarified so that it includes a change in board control (rather than any change in the composition of the board). Some of the new rules relating to reverse takeovers impose obligations to appoint sponsors and will therefore not apply until 31 December 2012 also.
  • Transactions - for Class 1 circulars, under LR 13 Annex 1, the information required under Annex I item 24 (documents on display) must now include a copy of the share purchase agreement or equivalent document, if applicable. This enshrines previous UKLA guidance into the Listing Rules. Where a supplementary circular is required to be issued under LR 10.5.4R, it should be sent to shareholders no later than seven days before the date of a meeting.
  • Financial information – shares in public hands: it was previously proposed, following the UKLA’s existing approach, that holdings of different fund managers within the same organisation would be treated separately, provided investment decisions were made independently. This proposal has been carried over into the new consultation paper.
  • Externally managed companies - the original proposals have been amended to clarify that the new rules (principally that an externally managed company will not be eligible for a premium listing) will not apply to collective investment undertakings and closed-ended investment funds. There is a transitional period of 15 months (until 31 December 2013) for premium listed issuers who currently use an external management structure to enable them time to give notice under existing management contracts and put new arrangements in place.

Enhancing the effectiveness of the Listing Regime

When the FSA consulted, in January, on the changes to the Listing Rules, it had stated that as part of the review it would be having high-level discussions on the wider issues around the quality of the premium listing regime, including the free float and minority shareholder protections. As a result, a further consultation has been published which focuses on:

  • Corporate Governance – the FSA proposes to reintroduce the concept of a controlling shareholder (principally, those entities with a 30% plus holding in an issuer), requiring a relationship agreement (with minimum content requirements) between the controlling shareholder and the company, at all times.  The FSA is also seeking views on whether a company can depart from the ‘comply or explain’ principle in the UK Corporate Governance Code and require companies, with a controlling shareholder, to have a board comprising a majority of independent directors or an independent Chairman and independent directors making up at least half the board. Independent directors would be elected by a dual voting structure requiring approval by both the shareholders as a whole and the independent shareholders. The FSA are also proposing that a copy of the relationship agreement be available for inspection.
  • Free float – it is proposed that shares subject to a lock up (longer than 30 calendar days) would be excluded from the calculation of shares in public hands. The FSA details the circumstances where it might modify the 25% free float requirement but it is unlikely to agree to a figure below 20%. It also proposes to allow, for companies with a standard listing, very low free floats in absolute percentage terms if there is sufficient liquidity.
  • Listing Principles – the FSA proposes to extend Principle 2 (systems and controls) and Principle 6 (open and co-operative) to all listed companies, rather than to just premium listed issuers, as well as adopting two new principles for premium listed issuers.
  • Eligibility for a Premium Listing and continuing obligations - new applicants for a premium listing will now be required to demonstrate that they control the majority of its business; the FSA propose that this will enable the focus to be on the issuer’s business rather than necessitating a focus on the valuation of assets at the last balance sheet date. Existing issuers will also be required to comply with this requirement on an ongoing basis. The FSA has provided guidance as to what they consider would evidence that an applicant does not control its business. The FSA is also proposing to extend the obligation of issuers to notify the FSA without delay for non-compliance with the Listing Rules to all continuing obligations contained within LR9.2 (which includes an ongoing requirement on issuers to control the majority of their business), rather than simply in relation to a lack of free float.
  • Implementation of the Alternative Investment Fund Managers Directive (‘AIFMD’) into the Listing Rules - in its discussion paper on the implementation of the AIFMD earlier this year, the FSA proposed that only internally managed funds subject to AIFMD (ie funds whose investment management function is the responsibility of the board), and not externally managed funds (ie funds employing a third party investment manager) should be eligible for premium listing. This proposal was met with significant resistance and as a result, the FSA is now proposing to drop the prescriptive requirements initially suggested. Instead it proposes new rules requiring the board to effectively monitor and manage the performance of key service providers, including investment managers, to be eligible, and to continue to operate under the regime.

The consultation closes on 2 January 2013.

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