In CP 17/4 "Review of the Effectiveness of Primary Markets: Enhancements to the Listing Regime", the FCA is proposing a number of technical amendments to the Listing Rules. The proposals reflect feedback received during the FCA’s review of the UK’s primary markets and issues which have arisen when issuers and their advisors have been discussing specific transactions with the FCA. Most of the proposals relate to the premium listing segment.
The consultation paper sits alongside the recent discussion paper on the UK Primary Markets Landscape published by the FCA.
Technical amendments: overview
The technical amendments include:
- Clarifications to the premium listing eligibility requirements for commercial companies – principally around the independence requirements (LR 6.1.4R) and the three-year financial track record requirements (LR 6.1.3B R to LR 6.1.3E G).
- A new concessionary route to premium listing for certain property companies which cannot meet the LR 6 three-year track record requirements.
- Changes to the profits test used by a premium listed issuer when classifying a transaction under LR 10.
- A new approach to the suspension of listing on a reverse takeover. The FCA will now assume that the market can operate smoothly on the basis of the information which the listed company makes publicly available as part of its existing disclosure obligations (principally the obligation to disclose inside information under MAR).
We have provided more detail on two of these technical amendments below. The first is likely to be of interest to those active in the real estate sector. The second to those tasked with applying the class test calculations to a transaction.
New technical notes
The consultation paper also contains eight new or revised technical notes. These provide additional guidance on the operation of the Listing Rules. For example:
- The FCA has prepared a new technical note on the independent business requirements for companies applying for premium listing and the interpretation of new LR 6.4 (Independent business), new LR 6.5 (Controlling shareholders) and new LR 6.6 (Control of the business).
- The FCA is proposing to introduce a new technical note to explain the new concession for certain property companies from the revenue earning track record requirements.
- A new technical note has been produced for mineral companies.
- The FCA also intends to replace the current guidance note for scientific research based companies.
New concessionary route to premium listing for property companies
As a general rule, commercial companies which apply for premium listing are required to have a three-year revenue earning track record. There are already certain 'concessionary routes' to premium listing.
The FCA has identified two types of property companies which could be eligible for a new concessionary route. These are:
- Property companies which have been established for less than three years, but which predominantly hold mature, let assets that generate revenue. The FCA notes that the track record of these companies as the current ‘holding vehicle’ of those assets is arguably less important than the performance of the assets themselves. It gives as an example a spin out and listing of a mature portfolio.
- Property companies which develop assets, and have done so for three years, but which focus on long-term projects. The FCA notes that "For these companies, the issuer’s ability to demonstrate successful development activity representative of its long-term strategy through several years of increases in the value of the assets on its balance sheet, and supported by the property valuation report, will be much more informative than revenue figures".
This reflects feedback which the FCA has received which suggested that the FCA should create a new concessionary route for certain types of property companies, which are typically assessed and valued against their property valuation report rather than a financial track record.
Changes to the profits test used by premium listed issuers
The FCA is proposing the following changes in its approach to the profits test when classifying a transaction under LR 10 which would otherwise be classified as a class 1 transaction or reverse takeover.
If both of the following conditions are met, an issuer which has a premium listing can disregard the profits test for the purposes of classifying the transaction without consulting the FCA:
- The calculation under the profits test produces a percentage ratio of 25% or more and that result is anomalous.
- All other applicable percentage ratios are less than 5%.
This means that the transaction will be unclassified for the purposes of LR 10.
If the calculation under the profits test produces a percentage ratio of 25% or more and that result is anomalous, an issuer which has a premium listing will be able to make certain adjustments to the figures used in the calculation under the profits test without consulting the FCA.
In relation to both proposals the FCA notes that issuers would still need to obtain the guidance of a sponsor. LR 8.2.2R, which states that "If a company with a premium listing is proposing to enter into a transaction which due to its size or nature could amount to a class 1 transaction or a reverse takeover it must obtain the guidance of a sponsor to assess the application of the listing rules, the disclosure requirements and the transparency rules", remains.
However issuers will not be required to consult with the FCA before taking advantage of these new rules. The FCA has also published an updated technical note on the classification tests.
The FCA notes that for all other situations where the premium listed issuer considers that the profits test produces an anomalous result, the FCA proposes to keep its existing requirement that the issuer must consult the FCA if it wants to modify the way it applies the profits test rules. This would include related party transactions (subject to the requirements of Chapter 11 of the Listing Rules) and class 2 transactions where the issuer is not required to seek the guidance of a sponsor.
The proposed changes to the profits test do not apply to issuers with a standard listing when applying the class tests to determine if a transaction is a reverse takeover.
The FCA has asked for responses to the questions set out in the consultation paper by 14 May 2017. The FCA will then consider the feedback received and will publish a Policy Statement containing the new rules in the second half of 2017.