Yesterday the FCA announced new rules, the majority of which come into force today (3 December 2021), which are intended to prevent smaller companies obtaining admissions to the Standard Segment of the Official List. This will have been a great disappointment for smaller issuers who have used this route to listing as a cost effective way to obtain access to public markets. However, some other changes may make the Official List more appealing to larger issuers.
The key changes announced are:
- increasing the minimum market capitalisation threshold for both the premium and standard listing segments for shares in ordinary commercial companies from £700,000 to £30,000,000;
- reducing the amount of shares an issuer is required to have in public hands (known as the free float) from 25% to 10%; and
- allowing a targeted form of dual class share structures within the premium listing segment.
Increase in minimum market capitalisation The Listing Rules requirement for companies to have a market capitalisation of at least £700,000 to be admitted to the Official List has been around for almost 40 years, having last been changed in 1984. The FCA considers that the requirement is out of date given market value growth since it was imposed, and is concerned about the lack of liquidity in companies with smaller market capitalisations. They also think that smaller companies would benefit from guidance on their responsibilities by Nomads or corporate advisers, as required by the rules of AIM and the Aquis Growth Market.
Having consulted on potentially increasing the minimum market capitalisation for admission of shares to the Official List to £50,000,000, the FCA have decided to proceed with a change, but at the lower level of £30,000,000.
The minimum market capitalisation rule applies only on admission, rather than being a continuing obligation, and some transitional provisions have been included to ease the impact of this change on current issuers and those who are in the process of applying for admission. These are broadly:
- anyone who completed a submission for an eligibility review before 4pm yesterday (2 December 2021) will still be subject to previous £700,000 requirement as long as they have applied to list before 2 June 2023;
- already listed shell companies / SPACs can apply to re-list on a reverse takeover based on the previous £700,000 requirement limit as long as:
- they have completed submissions for an eligibility review for listing and a prospectus review on or before 1 December 2023; and
- there is no material change to their overall business proposition during the transition period. The FCA has not provided a comprehensive summary of what a material change to overall business proposition might be, but has suggested it might include things like a founder’s exit or a significant change in the directors or principal shareholders of a company if they hold a significant influence or the applicant is a shell company; or a material change in the nature of the proposed business. It’s also worth noting that if the FCA lapses an application because there has been no substantive activity for three the issuer will lose the benefit of these transitional provisions.
- if a company has existing listed shares it can list additional classes based on the previous £700,000 requirement.
While the transitional provisions are helpful for some, the overall impact of this requirement is likely to be to drive smaller companies to list on Aquis Growth Market or AIM – which is precisely the FCA’s objective in introducing this change.
Decrease in Free Float Requirement Currently issuers listed on the Official List have an on-going obligation to have at least 25% of their shares in public hands, unless the FCA agrees otherwise. The FCA has elected to reduce this requirement to 10% of the shares for all issuers (including issuers who don’t need to comply with the £30,000,000 minimum capitalisation requirement).
Obviously 10% of £30,000,000 is a lot more than 25% of £700,000 so this change can be expected to increase the value of the free float for issuers under the new market capitalisation rules. For issuers to whom the old minimum market capitalisation rules apply, this may make it easier for them to raise additional funds, in particular because it will potentially allow them to take investments from investors which exceed 5% of the shares and therefore would not count towards the free float.
Dual Class Share Structures Currently companies admitted to the Premium Segment of the Official List are not permitted to have dual class share structures (“DCSS”) which provide additional protections to some shareholders (such as founders) by giving them weighted voting rights. The FCA is concerned that this might be off-putting for some potential issuers, who instead list on more flexible markets such as NASDAQ. It has therefore agreed to permit introduction of DCSS into the Premium Segment, within limits. These limits are:
- a maximum weighted voting ratio of 20:1
- the relevant shares may only be held by directors of the company or beneficiaries of such a director’s estate
- weighted voted rights only to be available in two limited circumstances:
- a vote on the removal of the holder as a director; and
- following a change of control, in relation to a vote on any matter (intended to operate as a strong deterrent to a takeover); and
- weighted voting rights can only be held by directors of the company.
These rights must also expire within five years.
Overall these changes are positive for larger companies which wish to list on the Standard Segment to take advantage of its less onerous on-going requirements compared to the Premium Segment. However, the new minimum market capitalisation rules will prevent the smaller companies who typically use the Standard Segment from listing. Overall we expect that the changes will result in the quiet expiry of the Standard Segment for shares over time, and that smaller issuers will either have to find homes on Aquis Growth Market or AIM, or find another route to achieving their commercial objectives. It will be interesting to see if Aquis or AIM adjust their own free float requirements, in particular, to reflect the FCA’s revised approach to that issue.