Recommended changes include allowing dual class share structures for premium listed companies, changes designed to increase the attractiveness of UK listings for SPACs, and changes to the free float requirement.
It was announced on 9 November 2020 that HM Treasury would establish a taskforce to review and make recommendations on changes to the UK's listing regime, with the aim of attracting more companies to list in the United Kingdom. On March 3, 2021, the UK government published the results of the UK Listing Review, which was chaired by Lord Jonathan Hill. The report notes that the United Kingdom faces a number of challenges in attracting listings in the global market, with strong competition from the United States, Asia, and increasingly (and in the context of Brexit) parts of Europe. In particular, the report notes that the United Kingdom does not appear to be maximising opportunities for technology listings and the “new economy.” The report recommends extensive reform, but notes the need to maintain the UK’s reputation of providing a high standard of shareholder protection and governance safeguards.
Key recommendations of the UK Listing Review include:
- Allowing dual class share structures, with weighted voting rights, for premium listings
- Premium listed companies cannot currently extend weighted voting rights to holders of different classes of shares.
- The report recommends permitting dual class share structures, subject to certain safeguards, including
- a five-year limit;
- a maximum weighted voting ratio of 20:1;
- requiring a holder of weighted voting rights to be a director;
- limiting weighted voting to certain matters; e.g., right to remain a director and changes of control; and
- limiting circumstances in which weighted voting shares can be transferred without converting (e.g., for estate planning).
- Reforming the rules regarding special purpose acquisition companies (SPACs)
- The UK regime is currently considered to be unattractive to SPACs, in particular because of the presumption that trading in shares should be suspended on announcement of a potential acquisition by a SPAC (a De-SPAC). This can result in investors being locked in, rather than being able to trade out if they do not like the proposed De-SPAC. It is recommended that this presumption of suspension be removed for De-SPAC transactions.
- In addition, safeguards could be developed for SPACs, such as
- a requirement for shareholder votes on De-SPAC transactions;
- redemption rights for investors prior to completion of a De-SPAC;
- information requirements on target companies; and
- the regime (and removal of the presumption of suspension) may be subject to a minimum size criteria, so that small cash shells remain governed by the current regime.
- Making certain changes to the free float requirement
- A reduction of the free float requirement (i.e., the company’s shares in public hands and freely available for trading) from 25% to 15%.
- Changes to the definition of free float to better reflect shares which are actually liquid (e.g., so that institutional investors below 10% will count towards the free float) and to exclude shares subject to certain lockups.
- Allow companies to use other measures to demonstrate liquidity (e.g., minimum number of shareholders, or a minimum market value of public shares).
- A fundamental review of the prospectus regime
- The report concluded that the current prospectus regime, which is based on the EU Prospectus Directive and Prospectus Regulation, does not best serve the UK’s capital markets, and recommended a fundamental review.
- Areas for change that may be considered include:
- making it easier for companies to provide forward-looking financial information (e.g., by including a liability defence for directors);
- tailoring the information required to the type of capital raise (e.g., slimmed down requirements for further issuances);
- having different prospectus requirements for admissions to regulated markets and offers to the public;
- flexibility on the application of prospectus exemption thresholds, depending on, e.g., the type of fundraising; and
- use of alternative listing documents (e.g., for further issuances) and potential recognition of documents prepared in other jurisdictions (e.g., for secondary listings).
Other recommendations include the following:
- Exempting high growth, innovative companies from the three-year revenue earning requirement (while maintaining the requirement for a three-year track record) for premium listings
- Amending the premium listing requirement for historical financial information covering at least 75% of an issuer’s business so as only to apply to the most recent financial period
- Rebranding and repositioning standard listing to increase appeal, with the possibility that standard listed companies could be eligible for certain indices
- Improving the efficiency of the capital raising process, including through the use of technology, in particular to benefit both issuers and retail investors
- Adding a new regulatory duty on the FCA to take into account the UK’s overall attractiveness as a place to do business
- Use of technology to encourage retail investor involvement in corporate actions and company stewardship
- Impact assessment on, and potential abolition of, recent FCA rule changes relating to unconnected analysts’ participation in the IPO process (which has in practice added a week to the UK IPO timetable)
Next steps for implementation of recommendations:
- The government is in the process of reviewing the recommendations and is yet to set out its next steps.
- Some recommendations will need further consideration by the Treasury (e.g., in respect of prospectus rules and the approach to forward-looking information).
- The FCA will need to consult on changes to the Listing Rules, but is aiming to publish new and amended rules by late 2021.
Conclusion
We may already be seeing an encouraging response in the market – when Deliveroo recently announced that it had chosen London for its expected future listing, it specifically referred to the review, stating on its website that its IPO was expected “to include a time-limited dual-class share structure closely aligned with the findings of Lord Hill's UK Listing Review.”[1]
Contacts
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
London
Iain Wright
Mark Geday
Karla Mullins
[1] See Deliveroo Selects London as Future Listing, as at 9 March 2021.