The FCA is consulting on a proposal to amend provisions of the Listing Rules which relate to cancellations of listings. The rule in question deals with the situation where a controlling shareholder makes an offer for the shares of minority shareholders. It was introduced to enable cancellations to take place where, after such an offer, an issuer may otherwise be left with a low free float. However, it has transpired that the rule may, inadvertently, enable a controlling shareholder to achieve a cancellation by avoiding protections that are intended to protect minority shareholders in such situations.

The consultation is contained within CP 15/28 (Quarterly Consultation No. 10). Responses to this part of the consultation need to be received by the FCA by 5 November 2015.

Background

As a result of its consultations on measures to enhance the effectiveness of the listing regime in 2012 and 2013 (CP12/25 andCP13/15 respectively), the FCA adopted, amongst other things, measures intended to deal with situations where a controlling shareholder does not maintain an appropriate relationship with a premium listed company. The measures were set out in PS14/8and were implemented in May 2014.

A key area of concern that was identified was the need to safeguard minority shareholders on a proposed cancellation of a listing. The protection that was introduced to deal with this was the requirement for a company with a controlling shareholder to have any application for a cancellation supported by a majority of votes of its independent shareholders. This is in addition to the requirement that already existed for cancellations to be supported by 75% of votes cast in general meeting.

Similar requirements apply to cancellations on a takeover, in that, where the offer is made by a bidder which is interested in more than 50% of the voting rights before announcing its firm intention to make an offer, it must obtain not only 75% of the voting rights but also a majority of the voting rights of the independent shareholders. However, at the time these requirements were introduced, an exception was also created to disapply the need to obtain a majority of the independent shareholders' voting rights where the bidder nonetheless has, as a result of the offer or otherwise, 80% of the voting rights. The exception is contained in LR 5.2.11DR.

The exception was introduced because the FCA had concerns about reduced free floats where a bidder held 80% of voting rights without having acquired the necessary majority of the independent shareholders' voting rights. In those situations, a bidder would not be able to obtain a cancellation, and yet, 20% or less of the voting rights would be publicly held. The exception, therefore, permits a cancellation where 80% of shares are held by the bidder regardless of whether a majority, or indeed any, of the independent shareholders accepted the offer.

Subsequently, however, the FCA has become concerned that, in the exceptional circumstances of a company being permitted to list with an 80% controlling shareholder, a takeover offer could later be made by that shareholder to acquire the shares of the minority, and, even if it receives no acceptances, still obtain a cancellation. In this way, the protection that was intended to be afforded to minority shareholders on a proposed cancellation could be avoided.

Possible solutions

The FCA has, therefore, been considering how to deal with this anomaly. The possibilities considered were:

  • expanding the guidance in respect of a waiver of the free float requirement and/or including a new premium listing eligibility condition for applicants with a controlling shareholder (and a corresponding continuing obligation). Whilst such approaches could help to identify those actual or prospective listed companies that could pose a greater risk of future problems, the FCA believes that the free float requirements are about determining liquidity, rather than acceptable governance standards,
  • limiting the scope of action of the controlling shareholder by expanding the list of mandatory independence provisions included in the agreement between a company and its controlling shareholder(s). For example, a new independence provision could be introduced to require a controlling shareholder, if it makes a takeover offer for the company, to include a non-waivable condition in the terms of the offer that the offer will be declared unconditional in all aspects only if acceptances of the offer are received from independent shareholders which represent a majority of voting rights held by independent shareholders. However, the FCA feels that this could be inconsistent with the principle it has followed that the agreement should do no more than codify existing market practice. Moreover, it believes that provisions of this nature would be disproportionate and possibly ineffective,
  • maintaining the current rules but seeking to exercise discretion on an application to cancel the listing on a case-by-case basis. However, the FCA believes this would remove the implication of an assurance that the 80% control provision in LR 5.2.11DR would be effective, or
  • deleting the 80% control provision in LR 5.2.11DR. This would require a controlling shareholder to obtain acceptances of their offer from independent shareholders which represent a majority of voting rights held by those shareholders for a cancellation request to be made.

The recommended proposal

Given the difficulties that the FCA sees with the first three options, and the fact that it is the introduction of LR 5.2.11DR that has, in mitigating one difficulty, created another of potentially greater significance in terms of investor protection, the FCA is proposing to adopt the last approach. That is, to delete LR 5.2.11.DR. However, the FCA stresses that this should not be seen as implying a more general tolerance of low free floats and points out that it retains the ability to initiate delisting where the remaining free float proves too small to support adequate liquidity.

The proposals are contained in Quarterly Consultation No. 10 (CP15/28). To see the consultation in full, click here. Responses to this part of the consultation need to be received by the FCA by 5 November 2015.