Despite the pandemic and uncertainty around the outcome of the US election, the volume of IPOs in the US market more than doubled in 2020, while the number of IPOs on the London market also increased but by a less impressive margin. London was still the dominant market in Europe with approximately 36.1% of capital raised in European IPOs in 2020 coming from the London market, but significant evidence of a Brexit effect on equity markets appears in the migration of trading in European share trading from London to Amsterdam. Companies looking at potential IPOs have taken notice and Euronext has been actively marketing to them. Non-UK European companies, particularly in the tech sector, considering an IPO in 2021 are in many cases beginning the process keeping options open between New York, London and Amsterdam. Questions are being asked about whether the London markets are attractive enough to technology (including health-tech) and other growth area companies that are contributing to the US IPO boom, and if not, whether there are any changes that may or ought to be implemented for London to remain competitive.
The UK Listing Review, published on 3 March 2021, sets out a number of recommendations designed to revitalise the UK capital markets landscape by, among other things, making the UK a more attractive prospect for companies (especially technology and high-growth companies) that are in the process of deciding where to list and making further fundraising procedures more efficient for companies already listed in the UK. The recommendations aim to refresh the status of the UK market, and UK listed companies, as attractive investment prospects for both institutional and retail investors.
Click here to read the full text of our review of each of the recommendations which could affect existing and prospective issuers as well as investors and advisors.
The Hill Report – a plan to revitalise the UK capital markets landscape APRIL 2021 UK-651998907.1 2 The Hill Report – a plan to revitalise the UK capital markets landscape Despite the pandemic and uncertainty around the outcome of the US election, the volume of IPOs in the US market more than doubled in 2020, while the number of IPOs on the London market also increased but by a less impressive margin. London was still the dominant market in Europe with approximately 36.1% of capital raised in European IPOs in 2020 coming from the London market, but significant evidence of a Brexit effect on equity markets appears in the migration of trading in European share trading from London to Amsterdam. Companies looking at potential IPOs have taken notice and Euronext has been actively marketing to them. Non-UK European companies, particularly in the tech sector, considering an IPO in 2021 are in many cases beginning the process keeping options open between New York, London and Amsterdam. Questions are being asked about whether the London markets are attractive enough to technology (including health-tech) and other growth area companies that are contributing to the US IPO boom, and if not, whether there are any changes that may or ought to be implemented for London to remain competitive. The UK Listing Review published on 3 March 2021, (the “Hill Report”) sets out a number of recommendations designed to revitalise the UK capital markets landscape by, among other things, making the UK a more attractive prospect for companies (especially technology and high-growth companies) that are in the process of deciding where to list and making further fundraising procedures more efficient for companies already listed in the UK. The recommendations aim to refresh the status of the UK market, and UK listed companies, as attractive investment prospects for both institutional and retail investors. The aim is to demonstrate that the UK is capable of maintaining its traditionally high standards but combined with an understanding of a living and dynamic market to which flexibility and agility can be applied to successfully attract more of the future growth companies to choose London as their choice of venue to list. It is hoped that this in turn would trigger more capital, more investment, more jobs and better returns for investors for a regenerative effect overall on the UK economy. These recommendations are not designed to create a gap between the UK and other global centres by proposing off-market changes to seize a global competitive advantage, but rather to close a gap that appears to have opened up to ensure the UK does not fall behind or miss out on the various opportunities that have arisen and are trending today. A summary of the recommendations in the Hill Report, together with commentary, is set out below. 1. Chancellor’s annual report on the State of the City The main goal of the proposals in the Hill Report is to promote the attractiveness of the UK as a wellregulated global financial centre, with dynamic capital markets and a strong ecosystem to attract future growth companies to list and grow in London. These recommendations are a starting point and implementing and perfecting them will be an ongoing process requiring various stakeholders to coordinate to create a living, dynamic and flexible system in which rules may be relaxed or tightened in response to market experience. It is proposed that the Chancellor’s annual report would provide a summary of the steps taken towards these goals during the year, the progress made (including key performance indicators such as number of IPOs, volume of capital raised and trading volumes), commentary on what has or has not worked and recommendations for further reform. Various stakeholders would be asked to contribute to the production of the annual report to promote a cohesive approach to promote the attractiveness of London as the best financial centre for equity capital markets. UK-651998907.1 3 2. FCA statutory objectives Key to developing and maintaining a dynamic, living and flexible financial ecosystem is a regulator that can decisively and quickly react to the market by relaxing or tightening rules. It is noted that while other financial regulators like those in Australia, Singapore, Hong Kong and Japan are specifically tasked with promoting the competitiveness or growth of their markets as a regulatory objective, this is not included in the statutory remit of the FCA. The Hill Report recommends that the FCA’s statutory objectives be expanded to include a duty to take into account the UK’s overall attractiveness as a place to do business by promoting growth or competitiveness. 3. Dual Class Share Structures Currently companies with a dual class share structure are not eligible to list on the premium segment of the UK Main Market as the premium listing principles prevent companies from extending different voting rights to holders of different classes of shares. In contrast, in the US, dual or multiple share classes have long been accepted, in more traditional companies, such as Ford, The New York Times and Hershey and more recently by technology companies, including Alphabet and Facebook. That is not to say that the use of multiple share classes has not been uncontroversial in the US. The practice has come under scrutiny in recent years and, as a result, recent US IPOs have included sunset provisions under which the shares convert to a single class after a certain amount of time, five, seven or ten years. Companies with dual-class share structures are often favoured by founder-led technology companies, as they allow founders to list their company and take in investment while retaining a high degree of control, by way of weighted voting rights, to ensure they can deliver their vision of how the business should grow. The Hill Report notes that the biggest concern for founders tends to be the threat of an unwanted takeover shortly after listing if investors are only focused on short term results. Given the preponderance of technology companies launching IPOs in the US and the number of European technology companies thought currently to be considering an IPO, it seems likely that such companies in Europe would find the idea of a London IPO more attractive if the Listing Rules allowed the founders could retain a greater degree of control (at least over the first years after the IPO) through dual class structures. If the FCA and the investment community in the UK want these IPOs to come to London, then allowing dual-class structures may be a price worth paying. The Hill Report recommends that eligibility for premium listing be broadened to include companies that begin listed life with a dual-class share structure for a maximum transition period of five years from listing, but subject to certain restrictions applicable during that transition period such as maximum weighted voting ratios, limitations on ownership and transfer of the voting class of shares, and limitations on matters subject to weighted voting such as blocking the removal of directors or blocking takeovers. There is no suggestion to amend the UK listing rules which require shareholder authorisation for major acquisitions, disposals or transactions with related parties do not make provision for weighted voting rights. While founders may seek to protect their own position or fend off an unwanted takeover during the transition period, it would potentially still be difficult to carry out their vision of how their business should evolve if that intended evolution depends upon the company being able to carry out such transactions, but shareholders are unconvinced. 4. Rebranding & Remarketing the Standard Listing Segment The standard listing segment of the Main Market, introduced in 2010 applies what used to be described as “directive minimum” rules for listing, meaning the minimum required under the relevant EU legislation, while the premium listed segment applies the UK’s super equivalency listing rules. While the alternative UK markets (AIM, Aquis and the High Growth Segment) are distinguished from the Main Market and serve different purposes, the standard listing segment’s current branding does little to distinguish itself, or make itself attractive, as a specific market for any particular type of company or industry. Premium listing is also currently the only way in which issuers can ensure they are included in leading share indices such as the FTSE UK Index Series. As a result, standard listing is often seen as the resort of companies that cannot UK-651998907.1 4 qualify for premium listing at the time of IPO and many discuss in their prospectus the intention later to transfer to a premium listing. The report recommends that the standard segment be rebranded and relaunched by (a) promoting it as a venue for all types of company to list but with its unique selling point being flexibility; and (b) allowing issuers on the standard listing segment to be included in share indices, consulting with investor groups to produce appropriate guidelines for index inclusion. Index inclusion is not a question of regulatory change, but a matter for FTSE Russell, which consults with the market before making significant changes to the rules governing its indices, to be consulted on the timetable for regulatory reform. 5. Free Float The FCA’s free float rules require 25% of an issuer’s shares to be held in public hands at listing and on a continuing basis thereafter. Certain holders are discounted from the calculation of a free float such as directors or holders of 5% or more of a company’s share capital. The free float rule reported as one of the main deterrents for companies when considering where to list, especially if they are high growth or private equity backed companies which may find it difficult to attain those thresholds unless they come to market with an already very fragmented shareholder base. Most other global markets’ approach to the setting of the required level of shares in public hands is to use a combination of metrics to measure liquidity over time. The provision incorporated in the Listing Rules dates back to the original EC Admissions Directive in 1979. The FCA has always taken a stricter approach to free float than required by EU regulation making the acceptance of a percentage lower than 25% a specific matter for it to judge in a specific case. In practice, the FCA has rarely derogated from this requirement, however large a company’s share capital at IPO. Other European regulators interpret the free float less strictly. The Hill Report recommends that the free-float requirement be reviewed and amended by (a) considering the parameters of the current definition of shares in public hands to determine if certain shareholders may be counted within the public hands threshold; and (b) lowering the absolute requirement for free float from 25% to 15% and allowing companies of different sizes to use measures alternative to an absolute free float percentage to show sufficient liquidity in their shares following listing. Free float is another area where change to the FTSE index rules would be required. The current requirements under the FTSE rules for UK incorporated companies are broadly in line with the FCA’s eligibility requirements for listing (i.e. 25% free float, but calculated slightly less restrictively), but include a major disincentive to listing in London for non-UK incorporated companies in that the FTSE rules require a free float of over 50%. If London is to attract more IPOs from non-UK companies, applying the same free float requirement as for UK companies will be essential. It is, after all, not the case that merely being incorporated in the UK necessarily makes a company more “British”. Indeed, the largest companies in the premier index, the FTSE100 are global giants that make the majority of their revenue and have most of their operations outside the UK. FTSE Russell should be included in the discussion of changes to the free float requirements, as a change by the FCA with no change by FTSE would be much less effective in reinvigorating the London IPO market. Direct Listings The traditional IPO is expensive, with significant fees paid to investment banks, and time-consuming, generally taking at least six months with management having to meet with investors over much of that period, initially to develop their “equity story” with a limited circle in “early look” meetings, then with a slightly wider group, in “pilot fishing” meetings as part of the “price discovery” process, then finally with large numbers of investors around the world in the roadshow designed to build the book of demand over the last couple of weeks. UK-651998907.1 5 6. SPACs The big story of 2020 in the US IPO market was the boom in Special Purpose Acquisition Companies (SPACs) which accounted for half of all US IPOs in 2020, with over 200 SPACs listing, raising approximately USD80 billion. A SPAC, also known as a “blank cheque” company is a cash shell that lists on an exchange with the stated intention of finding a target or targets to acquire within a certain time span (typically two years), failing which it will return the money raised to investors. As a result of this US SPAC boom, an alternative to an IPO is to sell a private company to a SPAC. Several of the SPACs listed in the US last year have stated their intention of searching for European technology companies to acquire, so sale to a SPAC is being proposed to such companies as a quicker route to a US IPO in 2021. SPACs are not unknown in the UK – there have been some 50 UK SPAC listings in the last five years, but their popularity with investors lags far behind the US (only four SPACs were listed in the UK in all of 2020) for a few reasons: ― Prominent Failures: There have been some past prominent SPAC failures, such as Nat Rothschild’s Vallar which bought two Indonesian mining companies and moved to Premium Listing as Bumi before ending up being fined for Listing Rules breaches within two years. ― Structural differences between UK and US SPACs: In the US, investors are given the opportunity to vote when the SPAC makes an acquisition. US investors also have the right to redeem their shares if they do not like the proposed acquisition. Whereas in the UK, SPAC structures have not afforded these rights to investors, although the Listing Rules would not prevent doing so. ― Suspension of shares on announcement of an acquisition: The Listing Rules impose a suspension of the listing from announcement of the acquisition until a prospectus is published and the enlarged company is readmitted to listing. US SPAC investors have freedom to approve an acquisition, to sell their shares in the market or to require the company to redeem some or all of their shares. UK SPAC investors have no such freedoms but are trapped with un-tradeable shares until completion of the acquisition. Potential UK SPAC promoters point to the Listing Rules suspension requirement as the major disincentive for investors to put money into UK SPACs. The suspension requirement is imposed because a SPAC’s acquisition will almost always be a reverse takeover. The FCA has always taken the view that a reverse takeover represents such a fundamental change to a listed company that the market will be unable properly to value its shares until a new prospectus is published detailing the financial position and prospects and strategy of the combined company. For a SPAC it can be argued that such a suspension is not justified, A way to avoid this investment of time and expense, reduce the influence of the investment banks and remove the risk of under- or over-pricing the IPO is direct listing, a procedure through which a company lists on the stock market without issuing new shares or having its shareholders sell shares. This also has the advantage of removing the requirement for founding and other early shareholders to agree to lock-ups preventing them from selling shares for six months or even a year or more. Direct listings have become a popular alternative route to IPO in the US in recent years, with two prominent recent examples being messaging platform, Slack, and the music streaming service, Spotify. Direct listing has always been available as a way of achieving admission to trading on the London Stock Exchange in the form of an "introduction". Introduction is used routinely to achieve the listing of a company being demerged, so the mechanics are well understood, but the current free-float requirement is a major inhibiting factor for companies considering a direct listing in the UK, as achieving a 25% free float at listing will be difficult or even impossible for most private companies without a concurrent offering of shares. UK-651998907.1 6 as its shareholders invested specifically to benefit from such an acquisition and there is effectively no existing business. The Hill Report recommends that the rules on suspension of SPAC shares upon announcement of an acquisition are amended, rules and guidance on SPACs be developed including information to be disclosed to the market on announcement of an acquisition and investor rights regarding voting prior to, and redeeming initial investments on completion of, the acquisition. Changes of this nature, allowing investors to vote on an acquisition or vote with their feet by selling or redeeming their shares would be likely to make SPACs a more attractive investment prospect in the UK. Given the sheer number of US SPACs currently looking for acquisition opportunities in Europe, even regulatory and structural change might not be sufficient to incubate demand for UK SPACs in time to ride this trend, however long it may last. 7. Prospectus Regime redesign Responses to the call for evidence for the Hill Report suggest that the UK prospectus regime should be simplified and tailored according to the type of capital raise being proposed, so that key information can be highlighted for investors and easing regulation that often leads to excluding retail investor participation. Distinguishing prospectus requirements – offers and admission The Hill Report recommends distinguishing between prospectuses required for admission to a regulated market and those required for offers to the public (principally offers to retail investors), only requiring prospectuses where it is appropriate for the type of transaction proposed and allowing the use of alternative documentation where appropriate and possible (e.g. for secondary issuances). Shorter prospectuses or confirmations of no significant change The Hill Report recommends updates to the Prospectus regime with respect to secondary issuances that could, in some circumstances, lead to a complete exemption from the requirement to produce a prospectus or slimmed down requirements such as a simple confirmation of no significant change on the basis that companies that are already listed are already subject to corporate reporting requirements and market abuse rules that ensure market-sensitive information is immediately disclosed to investors, subject to allowances under the delayed disclosure regime, so that a prospectus would not necessarily provide any new meaningful information to investors. There is already an exemption in the Prospectus Regulation Rules for issuances of up to 20% of a company’s shares in an twelve month period and this exemption is commonly used by listed companies to achieve quick and efficient capital raises by placing shares with institutional investors, but the Pre-Emption Group’s (“PEG”) pre-emption guidelines restrict such placings to 5% of a company’s share capital plus a further 5% in the case of acquisition capital raisings. During 2020, the PEG raised this restriction to a 20% threshold matching the prospectus exemption threshold and many companies raised new equity quickly and efficiently taking advantage of this. If the PEG were to reinstate the 20% limit, there would be little need for regulatory reform for secondary issuances. The Prospectus Regulation Rules already allow for a shorter prospectus. Retail offer rules One meaningful update to the current rules could be to amend the prospectus requirements for retail offers. Under current rules, where an IPO is made available to the public, as opposed to being restricted to institutional investors, the final prospectus including the offer price is required to be made available at least six days before the end of the offer. This six-day period was introduced before widespread adoption of electronic distribution of prospectuses and is not needed today when prospectuses are made available via company websites. Offering shares to the public means that investors who have accepted the offer must be granted the right to withdraw their acceptance if a supplementary prospectus is published. Implementation of withdrawal rights will inevitably entail substantial delays to completion of the IPO, even though in reality the market will decide whether the IPO should proceed if it is not cancelled by the UK-651998907.1 7 8. Secondary or Dual Listings No significant concerns were raised in respect of the current secondary or dual listing regime in the UK, but to promote such listings in the UK, it is recommended consideration be given to whether foreign issuers may be allowed to rely on their home country prospectus when applying for a dual or secondary listing in the UK, subject to maintenance of the UK’s listing eligibility standards. 9. Forward Looking Information Currently companies seeking a listing in the UK must present three years’ worth of historical financial information in their prospectuses but forward-looking financial information in prospectuses tends to be limited to a short narrative from without any projections. The principal reason for this is the risk of liability and the unavailability of any form of auditor comfort in respect of such projections. US securities regulations contain a restricted safe harbour for companies providing forward-looking information in prospectuses and investors have indicated that they would like to be provided with rather more forward-looking information in UK IPO prospectuses as such information can be key to their determination of whether or not to invest in an issuer on an IPO, especially when it comes to high growth area companies. The current lack of a safe harbour in the UK has led to the current situation whereby institutional investors rely on analysts’ IPO research reports for projections, in contrast with the US where such IPO research is not permitted and forward-looking information is provided in the IPO prospectus. 10. Three-year track record requirement Although there was little in the response received by Lord Hill to suggest the three-year track record requirement was itself an impediment to issuers considering listing in the UK, it was noted that the difficulty faced by scientific research-based companies in complying with revenue earning requirements are also difficulties faced by other high growth area companies. While there are special provisions in the Listing Rules addressing such concerns for scientific researchbased companies those rules have not been updated since 1993 and should now be updated to broaden their application to a wider range of high growth innovative companies across a variety of sectors, and reviewing whether the current rules in place are still fit for purpose for scientific research based companies, particularly for those in the biotech sector. It will be important not to repeat the mistakes of the past, as it should be remembered that during the dotcom boom in the mid-1990s, start-ups were exempted from the track record requirement as long as they had a report prepared in respect of their technology, resulting in IPOs soaring with a glut of companies being listed with no track record, eventually resulting in a loss of realised value once the tech bubble burst. 11. HFI requirements Currently applicants for a premium listing are required to include in their prospectus historical financial information that covers at least 75% of the company’s business over the preceding three-year period. Responses received by Lord Hill indicated that there are a number of businesses that have decided against a premium listing because of the onerous nature of this requirement, or that other applicants have managed to fulfil the requirement by including accounting histories for entities that were no longer of any relevance to the company at the time of their listing application. This can result in being both unhelpful to investors but also overly burdensome and expensive for issuers. The report recommends that the 75% threshold is only made to apply to the most recent financial period within the three-year track record requirement. company, even in the absence of withdrawal rights. To delete or amend this provision would involve divergence from EU standards, but given that the UK’s departure from the EU means that prospectuses may no longer be passported into EU jurisdictions to allow retail offers (a practice that was relatively rare even when the UK was still a Member State), the change would have no effect on investors in the EU. UK-651998907.1 8 12. Technology and Retail Investment The UK privatisations of the ‘80s and ‘90s were supposed to usher in an era of share buying by retail investors. Over the last two decades, retail investor involvement in UK IPOs has become almost vanishingly rare. One factor that still discourages companies and their advisers from offering shares to retail investors at IPO is the fear of reputational damage if the shares suffer significant falls in value, particularly where preferential offers are made to customers and employees. There has historically been more than enough capital available from institutional investors in the UK and internationally to make retail investor participation irrelevant to the success of an IPO and, until recently, the inclusion of retail investors made settlement more complex and time-consuming, with the need to make provision for bounced cheques and the posting of the prospectus to thousands of addresses. The payment issue has now been resolved, as demonstrated by Primary Bid’s platform allowing retail investors to participate quickly and efficiently in secondary fund-raisings by listed companies, and prospectuses are distributed online. The reasons for excluding retail investors from fundraisings are dwindling, in contrast to the rapid increase in the pool of available retail investors with access to the UK capital markets due in part to the relatively recent introduction of pension auto-enrolment provisions in the UK. Making use of available technological advances and paying attention to ESG (environmental, social and governance) matters will play a large part in encouraging the next generation of retail investors to participate in fundraisings. It is recommended that the BEIS considers efficient ways of harnessing the technology now available to enable such investors to participate in the capital markets in a more modern way. 13. Improving secondary raise efficiency The coronavirus pandemic exposed the limitations of the UK markets when listed companies were in need of speedily carrying out emergency fundraising, as the only options available were (a) to carry out a fully preemptive offer which would be costly and time consuming; or (b) to carry out a non-pre-emptive placing only to institutional investors and either only within the limits of existing shareholder authorities obtained at the most recent AGM or outside those limits by using a Jersey cash-box structure. While the various investor and regulatory bodies acted quickly during the onset of the pandemic to relax existing pre-emption guidance to allow companies to raise emergency funding on a non-pre-emptive basis, and this resulted in companies being able to raise emergency funds quickly, the relaxations to the rule are no longer in place. A rights issue review group (the “RIRG”) had been established during the 2008 financial crisis to try to address the inefficiencies of carrying out fully pre-emptive offers and one of the recommendations that it made that was not taken forward at the time was a proposal to investigate more accelerated rights issue models such as the kind adopted in Australia, called “RAPIDs” (a Renounceable Accelerated Pro-rata Issue with Dual-bookbuild). Similar to a traditional rights issue, a RAPID comprises three unique elements: ― Two-tranche shareholder offer: the first tranche is an institutional offer by invitation only to substantial shareholders allowed to elect to participate within a narrow one to two-day window and covering the majority of the proposed issuance. The second tranche is a retail offer open to all shareholder not invited in the first tranche. ― Offer communications: the first tranche offer is made to, and elections made by, the beneficial owner of the shares or their fund manager directly, rather than first passing through the custodian bank, making the communication and election response time quicker. ― Election window: the first tranche offer election window is very short, usually being announced and closed on the same business day, in a similar way to an accelerated bookbuild or ABB placing. While RAPIDs were initially considered a short-term trend, they have now been adopted as a mainstream transaction for larger raisings in Australia and could be a useful solution for the UK. Given technological advances since the recommendation was originally made by the RIRG, and especially given global take up of technological solutions during the pandemic, it is recommended that an accelerated capital raising model similar to RAPIDs be explored further and that the RIRG be reinstated for that purpose. UK-651998907.1 9 14. Unconnected Research Analysts A rule introduced by the FCA in 2018 requires IPO connected research analysts to withhold publication of their own research for seven days following an intention to float announcement and the publication of a registration document if unconnected analysts had not been briefed alongside connected analysts. Although the rule was intended to promote unbiased, independent research and improve the quality and timeliness of information available to market participants, it does not appear to have resulted in any significant increase in unconnected analyst research on IPOs and instead has had a negative impact on issuers and the IPO process in that it builds in a seven day delay between announcement and research publication. The report recommends that the impact of this rule be explored further and, if it is failing meaningfully to promote the production of unconnected research, that the rule be abolished. 15. Wider financial ecosystem The Hill Report also looked at the wider financial ecosystem, indicating that there are missed opportunities for the UK capital markets due to regulatory restrictions in respect of capital available from pension schemes, a less competitive tax environment and the availability of SME research post implementation of MiFID-II. In terms of next steps, the recommendations in the Hill Report will be taken forward in the first instance by either the FCA (who will need to undertake a consultation on any changes it may decide to implement) or the Treasury. Reform of the current system would then depend on the whole marketplace taking responsibility and working together to revitalise the UK’s role in the global capital markets by regenerating the UK’s regulatory landscape to make London an attractive prospect for issuers and investors alike. If you have any questions or would like to discuss, please contact Charles Howarth or your regular CMS contact. 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