The New UK Listing Rules - The Most Significant Change to the UK’s Listing Regime in 40 Years

The new reforms to the UK listing regime (Listing Rules) published by the Financial Conduct Authority (FCA) came into force on Monday 29 July 2024, marking the most significant change to the UK’s listing regime in 40 years as part of the FCA’s broader effort to revitalise UK capital markets.

The reformed Listing Rules are designed to better align the UK’s listing regime with international competitors, increasing flexibility for listed companies by removing some of the more stringent requirements in favour of a more disclosure-focused approach that puts information in the hands of investors to support their investment decisions, with the aim being to attract diverse companies to the UK capital markets and stimulate economic growth. The FCA has noted that the new regime means a re-balancing of risk for investors, but also that the changes better reflect the risk appetite the wider economy needs to achieve growth.

Our previous Alert included a summary of the reforms following their unveiling by the FCA. In this Alert, we take a closer look at the key reforms and how they will impact various stakeholders, including listed companies, companies contemplating a listing, and investors.¹

1. Background and Reasons for the Reforms

The reforms are intended to address the perceived lack of competitiveness in the UK market, which has resulted in a long-term trend of declining numbers of UK equity listings (the number of listed companies in the UK has fallen by about 40% since 2008).² While the UK has been Europe’s biggest financial hub for many years, and remains so, UK listings have reduced significantly over the past decade or more, and London’s share of the global initial public offering (IPO) market in 2023 was less than 1%.³

The decline can be partly attributed to market perception that UK stocks have traded at a discount relative to certain international markets, with companies opting for international exchanges where they perceive better growth opportunities and less stringent regulatory constraints. Further, UK listings are more likely to include a secondary share sale, where existing shareholders (notably private equity funds) sell down their stakes. Other exchanges are typically seen as more founder-friendly, with fewer restrictions to bringing high-growth companies to market, and fewer obligations once a company has listed. In that vein, there has been an increased trend in companies that might previously have opted to list in London opting for listings in other jurisdictions (most notably the United States (US)), as well as existing UK-listed companies relisting on US exchanges and/or signalling their intention to move their primary listings to the US.

The FCA has sought to create a simpler, more disclosure-based listing regime with the new Listing Rules to help boost UK growth and competitiveness by making the regime more accessible and attractive to a wider spectrum of companies with diverse capital structures and business models. The reforms aim to close valuation gaps for UK-listed companies, particularly those with US-listed peers and to increase liquidity in the UK market. As noted by the FCA, the changes reflect an overall strategic approach of moving away from ex-ante controls set by regulators to a disclosure-based system which puts information in the hands of investors so they can assess the risks and decide whether to invest rather than relying on the FCA as gatekeeper.

2. Simplified Listing Categories

At the core of the new Listing Rules is the merging of the previous premium and standard listing segments of the London Stock Exchange (LSE) to create a single point of entry to the UK market for UK-listings of equity shares in commercial companies. This new unified category has been named the Equity Shares (Commercial Company) category (ESCC).

The UK’s previous dual premium and standard segments had received criticism for being overly complex and burdensome. The reforms aim to simplify the listing landscape, making it more straightforward for companies to navigate the process of going public. Part of the FCA’s rationale for these changes can be found in the UK Listing Review in 2021, which had concluded that the premium listing segment rules were regarded as overly burdensome and a deterrent for companies listing in the UK, while the standard listed segment was poorly perceived by companies and investors, even though it offered greater flexibility. As noted by the FCA, the absence of comparable rules in certain jurisdictions, in particular the US and European Union (EU), which both attract significant investment, suggest that such standards are not pre-requisites to investment.

In addition to the ESCC, four other listing categories have been created pursuant to the new Listing Rules, namely:

• Transition (for companies that are issuers of standard listed shares or ‘in-flight’ companies during the transition to new rules)
• Shell companies (including special purpose acquisition companies (SPACs))
• Secondary listings (for overseas companies with secondary listings)
• Non-equity shares (e.g. preference shares and deferred shares) and non-voting equity shares.

Various existing categories will be retained, including:

• Closed end investment funds
• Open end investment funds
• Certificates representing certain securities (depositary receipts)
• Warrants, options and other miscellaneous securities.

While the rules applying to the retained categories are largely unchanged, the FCA has aligned the significant and related party transactions regimes for the closed end investment funds category more closely with the ESCC by requiring disclosure via announcements and not requiring separate shareholder approvals or circulars for most transactions (see further at section 7 below).

3. Mapping of Existing Listed Companies on to New Listing Categories

The FCA previously notified all commercial companies with premium and standard listings how their entry on the Official List would be shown by mapping issuers’ existing listings to the new categories. Generally, all premium listed commercial companies have been automatically mapped to the ESCC. Companies with standard listings have been mapped to the new Transition category, which is a closed category based on the previous rules for standard listed shares (or the new Secondary Listing category, if applicable) – from 29 July, such companies will be able to apply to be transferred to the ESCC under the transfer process set out in the new Listing Rules.

All new applications submitted for eligibility review will need to comply with the processes and requirements of the new Listing Rules.

4. ESCC Admission Eligibility Criteria

The eligibility criteria for the ESCC will largely reflect the previous premium segment rules (thus are more onerous than the previous standard listing requirements). The UK Corporate Governance Code (UKCG Code) will also apply on a comply or explain basis to the ESCC, which was not previously a requirement of the standard segment. Companies that previously had a standard listing, now in the Transition category (or the new Secondary Listing category), do not have to report against the UKCG Code and will instead be able to choose an alternative corporate governance code.

Certain significant changes have been introduced which seek to simplify the eligibility criteria for companies listing on the ESCC and are intended to allow a wider and more diverse range of companies to list (e.g. high-growth companies, early-stage companies and companies which have been involved in multiple recent mergers and acquisition (M&A) acquisitions).

These changes include the removal of a three-year financial and revenue earning track record, historical financial information or an unqualified working capital statement as conditions to listing (although some of these financial disclosures are still required in the prospectus that applicants must publish as a gateway to IPO pursuant to the existing prospectus rules). There are now also no longer eligibility and ongoing rules requiring that a company has an independent business and has operational control over its main activities.

5. Dual-class Share Structures and Weighted Voting Rights

In recent years, the FCA has been re-evaluating its stance on dual class share structures (DCSS) and weighed voting rights and has now opted to take a more flexible and permissible approach to these in the new Listing Rules. The new rules allow for both natural persons (e.g. founders and directors) and pre-IPO investors that are legal persons (e.g. institutional investors such as private equity funds) to hold super voting rights under DCSS. Such legal persons, however, will be able to hold such super voting rights subject to a maximum of 10 years, after which enhanced rights expire. This is a more significant change than previously contemplated by the FCA (which was limited to natural persons, e.g. founders and directors).

DCSS are generally aimed at attracting certain institutional investors and companies with founder-led shareholders, allowing such shareholders to maintain greater control over the company through enhanced voting rights. While the FCA has acknowledged some investor feedback that is critical of the more flexible DCSS rules, its approach is that such structures should be a matter of negotiation by markets and of investor preference as to whether they invest in such companies and that de-regulation here should promote the competitiveness of UK-listed companies in global M&A.

6. ESCC Companies - Controlling Shareholders

There will now no longer be a requirement for issuers to enter into binding relationship agreements with controlling shareholders (the definition of which has remained the same; broadly, a person who alone or with their concert parties holds 30% or more of the voting rights). Issuers will still be required to demonstrate independence, and to remain independent, from controlling shareholders, but this will be governed through disclosures and a new mechanism requiring directors to formally give opinions on any resolutions proposed by a controlling shareholder where such director considers the resolution is intended to (or appears to be intended) to circumvent the proper application of the Listing Rules.

This differs from the FCA’s previous position, which relied on issuers entering into a binding agreement with controlling shareholders. The FCA has instead chosen reforms favouring a more flexible, disclosure-based approach and noted that investors will have to determine whether the relationship between a company and its controlling shareholder(s) aligns to their risk appetite in the same way they have to consider other potential risks and opportunities (but expects companies with a controlling shareholder seeking a listing to set out relevant information to assist investors’ understanding in this regard in its prospectus).

The FCA has further noted that, while it will no longer require such agreements, many issuers will have agreements already in place or decide to put them in place because they consider them useful corporate governance tools, which the FCA will continue to support.

7. Significant Transactions and Related Party Transaction Regimes

The FCA has adopted a disclosure-based approach to significant transactions and related party transactions, no longer requiring companies in the ESCC to obtain prior shareholder approval.

Class 1 Transactions

The new disclosure-based regime for significant transactions (at the ‘class 1 transaction’, 25% class test threshold⁴) removes the need for ESCC companies to seek prior shareholder approval for the transaction or publish a circular approved by the FCA, unless the transaction constitutes a reverse takeover. The FCA has removed the requirement for two years of audited accounts where available, or alternative statements regarding the fairness of the consideration by a board if not available, in relation to acquisitions. However, financial disclosures in respect of the target company will be required for disposals.

The new Listing Rules allow more flexibility regarding the content and timing of announcements for a significant transaction. In terms of timing, flexibility has been introduced to allow companies to take staggered approach to disclosures. An announcement is required as soon as possible once the terms of a significant transaction are agreed (the “initial disclosure”), the content of which will broadly reflect that of previous notification requirements for a class 1/class 2 transaction (although will be slightly enhanced). As soon as possible after (a) the terms of significant transaction are agreed and (b) the relevant information has been prepared or the company becomes aware of it, and in any event no later than completion of the transaction, the company must release an announcement (the “enhanced disclosure”) containing certain additional non-financial information (including material contracts and significant litigation) and (for disposals only) financial information relating to the target of the transaction. The rules also require a notification to confirm when a transaction has completed (and that there have been no material changes other than as disclosed). 

Related Party Transactions and Class 2 Transactions

The FCA has adopted a similar disclosure-based approach to related party transactions and does not require companies in the ESCC to obtain prior shareholder approval. When a large, related party transaction meets the 5% class test, it will be subject to market notification, the requirement for a sponsor’s “fair and reasonable” opinion, and board approval.

The FCA have also removed the smaller transaction (“class 2 transaction”, 5% class test threshold) disclosure regime. Noting that the appropriate level for prescriptive disclosure is a 25% threshold based on the class tests (as set out above) and that below this level it is proportionate to afford issuers the flexibility to make a decision whether and what information to disclose. The FCA note that notification obligations under the UK market abuse regime continue to apply, and issuers may find aspects of the prescriptive regime a useful framework for disclosure in respect of smaller transactions.

The changes seek to closer align the UK to other jurisdictions and remove the inherent risk to transaction-certainty caused by the requirement to seek shareholder approval. The changes to the significant transaction regime are intended to allow companies to compete more nimbly when looking to enter into such transactions. As with many of the amendments to the rules that provide companies with more flexibility, the duality of these changes may concern investors that have effectively lost the ability to ‘veto’ the board’s decision to enter into such transactions. While the FCA have acknowledged this concern and the fact that removal of the vote takes away an attractive stewardship mechanism, they note that the board of UK-listed companies will continue to be answerable to their shareholders as a whole and the changes do not alter a company’s obligations to its shareholders at law, nor the directors’ fiduciary duties. The FCA emphasise that it is for the board to own its decisions and be transparent about the company’s significant transactions. Further, shareholder approval will still be required for various other situations, including, for example, reverse takeovers, cancellations of listings and for certain non-pre-emptive issues of shares and share buyback arrangements.

8. Sponsors

Sponsors are still required for commercial companies (ESCC), shell companies and closed end investment funds at the application and listing stage - similar to a sponsor’s role in respect of admission of a company to the previous premium listing segment.

However, sponsors will now have a reduced role following listing, largely limited to:

• Reverse takeovers
• Related party transactions where a sponsor must provide a “fair and reasonable opinion” (see section 7 above)
• Where a company is required to publish a prospectus in connection with an application for admission of further shares
• Transfers into or out of the ESCC category (e.g. from the transition category to the ESCC or from the ESCC to the shell companies category)
• Any requests for individual guidance from the FCA, or for the waiver or modification of the significant transactions regime, including the class tests, or the related party transactions regime.

9. “Shell Companies” / SPACs

The Equity Shares (Shell Companies) category primarily adopts the rules that were previously applied to shell companies and SPACs in a standard listing, but has set time limits within which the FCA expects an initial transaction to be undertaken - 24 months to complete a transaction, but with additional flexibility to extend by 12 months up to three times, subject to shareholder approval, which can be extended for a further period of up to six months in specified circumstances. As noted in section 8 above, a sponsor will be required at admission and for the initial transaction.

10. Board Declarations

As part of the application process, the board of the company applying for its securities to be listed must provide a confirmation at admission that the applicant has appropriate systems and controls in place to ensure it can comply with its ongoing listing obligations and the UK listing principles.

11. Indexation

FTSE Russell, a subsidiary of the LSE, which maintains the FTSE indices (e.g. FTSE 100, FTSE 250 and FTSE-All Share), has confirmed that the ESCC and closed-end investment fund listing category are now the eligible listing categories for inclusion to the FTSE UK Index Series, replacing the premium segment.

FTSE Russell has further confirmed that there will also be additional categories for legacy standard segment listed companies:

• Equity Shares (Transition category)
• For non-UK incorporates with their primary listing on another major international market: Equity Shares (International Commercial Companies Secondary Listing category)
• For shell companies, including Special Purpose Acquisition Vehicles: Equity Shares (Shell Companies category)

In practice, the changes are expected to have minimal short-term impact on the various FTSE UK indices and FTSE Russell has emphasised that there will be no immediate impact to the index composition on day one of the new regime consequent to the Listing Rule changes.

12. Conclusion

The reforms represent a significant shift in the regulatory landscape of the UK capital markets, with an emphasis on a more disclosure-based approach (rather than prescribed rules) and reduced regulatory intervention. While the reforms may be largely seen as a positive step towards revitalising the LSE and are designed to enhance its competitiveness, certain stakeholders have noted the risks towards undermining the UK’s reputation for high quality listing and governance standards (which is seen as a positive differentiator for the UK market in a global context). Further, the reforms deliberately shift risk from issuers to investors, both in respect of the initial listing as well as ongoing obligations. It remains to be seen whether the new Listing Rules will help to improve market sentiment and provide the kickstart to UK equity capital markets that is badly needed, while also maintaining sufficient levels of corporate governance and shareholder protections such that London does not lose one of its key selling points.

13. What’s Next?

Looking forward, the FCA has noted that it plans to carry out a formal post-implementation review of the listing regime in five years’ time to provide a more holistic assessment of the impact of the new Listing Rules, both in terms of assessing realised benefits and concerns raised by stakeholders. The FCA indicated that it will pay particular attention to cases of issuers coming to market with DCSS structures and existing issuers undertaking significant or related party transactions. It has further noted that it will not hesitate to intervene prior to this date, if required to deliver its statutory objectives.

The FCA also intends to consult on the UK’s prospectus regime (including the rules on whether and when prospectuses are required) later this summer, with the aim of finalising the rules in the first half of 2025, as part of its broader efforts to reinvigorate UK capital markets.

^{1 See paragraph 1.15 of the FCA’s Policy Statement PS24/6 for a full summary of the changes.}

^{2 UK Listing Review.}

^{3 https://www.ft.com/content/7b58cfbb-fbb5-478a-adc7-0ac116f12960.}

^{4 The FCA has not carried forward the profits test from the premium listing requirements on the basis it often produced irregular results.}