On 16 May 2014, new Listing Rules came into force, which have been designed to offer greater protections to minority shareholders, particularly in premium-listed companies with controlling shareholders. On the same date, the FCA published its feedback statement: PS 14/8: feedback to CP 13/5 – Enhancing the effectiveness of the Listing Regime. Whilst the majority of the proposals set out in FCA consultation paper 13/15 remain unchanged, there are a few points to note.
Click here to read our summary of the proposals in CP 13/15. Otherwise, read on for a summary of what's new, together with the points to note from the feedback statement.
Who are your controlling shareholders?
New rules requiring premium-listed companies to enter into binding agreements with their controlling shareholders are now in force. A key point to note is that a controlling shareholder's 'associates' will no longer be caught by the definition of a controlling shareholder, as was originally proposed in the consultation. A controlling shareholder is defined as a person who exercises or controls on its own, or together with any person with whom it is acting in concert, the voting rights of the company. (However, the independence provisions in Listing Rule 6.1.4DR apply to the associates of the controlling shareholder, as well as the controlling shareholder).
Control of voting rights
In its feedback statement, the FCA clarifies that the concept of 'control of voting rights', as used in the definition of a controlling shareholder, would include situations where the shares are held on a person's behalf by a nominee or, in the case of shares held by a company, 'de-facto control, that is, where the control of more than 50% of the company that holds the shares is traced through a chain of controlled companies. Consequently, such persons would be caught by the definition of a controlling shareholder, even where they do not hold shares in the company directly. This commentary by the FCA is an important point to note, as it is not spelt out in the actual rules.
Acting in concert
The FCA has not provided guidance in the new Listing Rules on what is meant by persons 'acting in concert' – instead, it asks issuers and their advisers to conduct their own analysis, including taking into account any view of the Takeover Panel (Panel). Whilst the FCA does not wish to entrench the Panel's position into the rules on the basis that an agency should not fetter its own or another's discretion, it considers that in practice, the outcome of the FCA's deliberation on whether parties are acting in concert is unlikely to be different from any position taken by the Panel. The FCA further notes that issuers may seek individual guidance on the application of a rule from the FCA on a case-by-case basis.
Independence undertakings - not designed to punish shareholders acting fairly
Agreements with controlling shareholders must include prescribed independence undertakings. These include that controlling shareholders must not take any action which would have the effect of preventing the issuer from complying with its obligations under the Listing Rules and must not propose or procure the proposal of a shareholder resolution which is intended or appears to be intended to circumvent the proper application of the Listing Rules. The FCA confirms that it does not intend to restrict shareholders’ rights to engage fairly in company matters but is targeting behaviour that will be unfairly detrimental to the minority shareholders. Additionally, it states that it would not view the following use of powers by a controlling shareholder as preventing the company from complying with its Listing Rule obligations:
- accepting or making a takeover offer or voting in favour of, or proposing a scheme of arrangement to, effect a takeover offer;
- giving an irrevocable undertaking to a third party in connection with a takeover offer; or
- purchasing shares in the market in connection with a takeover offer.
The FCA will consider the 'totality of the controlling shareholder's interactions with the listed company' when considering whether actions or proposed resolutions might contravene the company's independence, rather than judging each action in isolation.
Additionally, the FCA notes that the prescribed undertaking by the controlling shareholder not to propose a resolution which might circumvent the application of the Listing Rules was designed to strengthen the de-listing provisions (which are explained in more detail below). The FCA provides an example of where a controlling shareholder procures an issue of shares by the premium-listed company to enable it to pass the cancellation vote. The FCA notes that it would view this as an intention to circumvent the proper application of the Listing Rules.
Are multiple agreements required?
Multiple agreements need not be entered into with each controlling shareholder if the company reasonably considers, in light of its understanding of the relationship between the relevant controlling shareholders, that a controlling shareholder can procure the compliance of another controlling shareholder and that controlling shareholder's associates with the independence undertakings. The names of any such 'non-signing' controlling shareholders must also be disclosed in the agreement.
When should agreements be put into place?
A premium-listed company with a controlling shareholder as at 16 May has until 16 November 2014 to put an agreement in place. A premium-listed company which gains a controlling shareholder will have six months from the event which results in that person becoming a controlling shareholder. New applicants which will have controlling shareholders once listed must put an agreement in place upon admission.
Annual report disclosure – new awareness qualification
The new Listing Rules provide that the board's statement in the annual report on whether the controlling shareholder and its associates have complied with the independence undertakings in the agreement can be qualified by its awareness. Additionally, the provisions clarify that the board's statement of compliance must be made in relation to the period under review.
Election of independent directors
The new voting procedures concerning the election or re-election of independent directors of premium-listed companies with controlling shareholders have come into force. A company has until its next annual general meeting to comply with these provisions (including making any necessary changes to the constitution) unless it has already given notice of its AGM, or, gives notice within three months of a controlling shareholder emerging.
Cancellation of a premium listing
The FCA has changed the Listing Rules relating to the cancellation of a premium listing of a company which has a controlling shareholder. As a cancellation of a premium listing removes from shareholders significant protections and rights to engage in the governance of a company, the FCA believes that it is crucial for minority shareholders to participate effectively in that decision.
The new Listing Rules provide that, where a company with a controlling shareholder wants to cancel its premium listing (or transfer to the standard segment from a premium commercial listing), it must obtain the approval of 75% of the shareholders' votes cast at general meeting and in addition, obtain separate majority approval in respect of the votes cast by the independent shareholders.
Cancellation relating to takeover offers
On a takeover offer, where the offeror, or any controlling shareholder, is interested in more than 50% of the voting rights of the premium-listed company before the offer is first announced, the offeror needs to obtain 80% of the voting rights following the offer to cancel the listing. If the offeror obtains more than 75% of the voting rights, but less than 80%, it needs either to acquire a majority of the shares held by the independent shareholders at the time when the offer was announced or to obtain approval by a majority vote of independent shareholders.
If an offeror is interested in 50% or less of the voting rights before announcing its firm intention to offer, then the existing regime continues to apply, which requires the offeror to have acquired or agreed to acquire not less than 75% of the issuer's voting rights following the offer.
Enhancing the Listing Regime
The FCA does not have any power to implement and enforce rules against controlling shareholders – consequently, it has introduced measures which have been designed to oblige issuers to keep their controlling shareholders in check. Issuers subject to the new rules will need to comply with their increased regulatory obligations, whilst ensuring that important relationships with controlling shareholders are not jeopardised. Indeed, we have seen some companies propose moving to the standard listing in order to avoid these pressures.
Companies with founding shareholders who are keen to retain a significant stake on a potential IPO will need to consider carefully the impact of the new rules when looking at London's premium segment. Are they prepared to comply with the new rules and be subject to increased regulatory scrutiny in order to retain a controlling stake? Alternatively, will the introduction of the new rules bring renewed confidence to investors and consequently, make the London securities market even more popular with investors? In addition, it will be interesting to observe whether these changes will provide a new boost for the standard segment – that is, by being a viable listing destination for those companies with controlling shareholders who believe that their company structure is not well suited to these new rules.