This alert provides a comparison of the options now available for an issuer seeking to access the UK's equity capital markets, with a focus on the new "High Growth Segment" of the London Stock Exchange's Main Market.
Since April 2010, companies looking to list in the UK have had a wider choice for listing their shares on the main market for listed securities (the "Main Market") of the London Stock Exchange plc (the "LSE"). The Main Market is the LSE's principal market for listed companies from the UK and overseas. There is a choice between a "premium" and a "standard" listing on the UKLA's Official List. Alternately, there is the option to list on the Alternative Investment Market ("AIM"), on which many smaller and growth companies are traded.
On 27 March 2013, the LSE launched the new High Growth Segment (the "HGS") of its Main Market and published the final version of the HGS Rulebook. The HGS has been designed for high growth issuers that are seeking a listing on the Main Market due to their size and stage of development. There are some parallels with the US's relaxation of certain regulatory requirements under the Jumpstart Our Business Startups (JOBS) Act to encourage "emerging growth companies" to list in the US. The HGS is intended to provide issuers with a transitional route to the UKLA's Official List and, as such, should help issuers prepare for admission to the UK's listed premium market over time and the obligations that accompany it. Indeed, HGS issuers must "clearly set out their intention" to eventually join the Main Market (if and when they become eligible).
This alert discusses the main differences between the premium and standard listing segments, the new HGS and a listing on AIM, and what the drivers might be in making a choice between those options, with particular reference to the recently launched HGS.
What do the different alternatives offer?
The standard and premium listing segments
The "standard" listing segment is often of interest to companies that would not derive sufficient benefit from a premium listing (in terms of increased profile, enhanced analysts' coverage, inclusion in the UK series of the FTSE indices and/or a more liquid market in their shares) to justify the expense of maintaining it and denotes a listing that meets minimum standards in the EU Prospectus Directive 2003/71/EC, as amended (the "Prospectus Directive"). A "premium" listing denotes a listing with the more stringent super-equivalent standards, including, for example, demonstrating a three-year financial track record, appointing a sponsor on admission and compliance with specified continuing obligations. These standards exceed the minimum standards required by the Prospectus Directive and are intended to promote investor and shareholder confidence, generally leading to an enhanced profile for the premium listed company and greater liquidity in its shares. A company which does not have a premium listing of its equity shares must not describe itself or hold itself out as having a premium listing, or otherwise suggest that it has a premium listing or complies or is required to comply with the premium listing requirements.
The standard and premium listing segments are further sub-divided into categories according to the characteristics of the relevant securities and the type of issuer. A premium listing is sub-categorised as a listing of (i) equity shares (commercial companies), (ii) equity shares (closed-ended investment funds), or (iii) equity shares (open-ended investment companies). The relevant shares must have "full voting rights" in order to have a premium equity listing and, accordingly, any non-voting or limited voting ordinary shares can only qualify for a standard listing. Similarly, securities convertible into equity shares, preference shares and warrants are only capable of having a standard listing. A standard listing is therefore sub-categorised as a listing of (a) shares (equity and non-equity), (b) debt and debt-like securities, (c) certificates representing certain securities (including GDRs), (d) securitised derivatives, or (e) miscellaneous securities (including convertibles).
The HGS will be a segment of the LSE's EU regulated market; open to both institutional and retail investors. In order to be eligible for listing on the HGS, prospective issuers must:
- be trading companies (so investment companies and mineral resource exploration companies will not be eligible);
- be incorporated in the EEA;
- have a three-year historic revenue compound annual growth rate of 20 per cent. or more (requiring a prospective issuer to present four years of financial data in order to demonstrate the required 20 per cent. compound annual growth rate);
- have at least 10 per cent. of their securities to be admitted in public hands and a sufficient number of shareholders to provide an orderly market with adequate liquidity;
- ensure that the value of their securities in public hands is at least £30 million, with the majority to be raised on admission by the issue of new securities or the sale of existing securities from the same class as that to be admitted;
- publish a prospectus approved by the UKLA or another EEA Member State's competent authority (unless an applicable exemption applies); and
- control the majority of their assets (as would be the case for a premium listing).
As is also the case for premium listings, only equity shares will be capable of being admitted to the HGS. HGS issuers will not be required to list on the UKLA's Official List and therefore will not be subject to the Listing Rules. However, although it will not be a listed segment, the HGS will be underpinned by the (i) EU financial services directives by virtue of being an EU regulated market (including the Prospectus Directive, the Market Abuse Directive and the Transparency Directive), (ii) HGS Rulebook, which sets out the responsibilities of issuers seeking admission or already admitted to the segment, and their key advisers (see further below), and (iii) LSE's Admission & Disclosure Standards (as regards the provision of information to investors on an on-going basis).
Issuers will be required to appoint a key adviser in relation to their admission to the HGS, whose role will be similar to that of a sponsor on an admission to the premium segment, and retain such an adviser on an on-going basis. Firms that want to act as key advisers need to be approved to do so by the LSE. The approval conditions require the adviser to (i) be an authorised person included on the list of sponsors maintained by the Financial Conduct Authority, (ii) be competent to perform the role, and (iii) have appropriate systems and controls in place to ensure that it can carry out its role as required under the HGS rulebook.
The AIM segment
AIM, which was launched by the LSE in 1995 as a platform to help growth companies raise capital, is generally considered to be the most successful growth market in the world. There is a "fast track" admission route to AIM whereby companies traded on certain designated markets may be able to transfer or obtain an additional listing on AIM without having to prepare and issue an admission document, provided the company has been listed on a designated market for at least 18 months before admission and certain other requirements are met. AIM rules impose greater regulation than a standard listing on issuers, including the requirement to have a nominated adviser ("NOMAD") and certain continuing obligations such as the requirements to notify or obtain shareholder consent to certain types of transactions. A standard listing will therefore be less onerous in terms of continuing obligations than either being in the HGS or on AIM.
The main area, other than the above eligibility criteria, where there are substantive differences between the premium and standard listing segments, the HGS and an AIM listing relate to the continuing obligations of the company once listed and these are outlined below. It should also be noted that the UK Government announced in its March 2013 Budget Statement that it would be "abolishing stamp duty on shares traded on growth markets such as AIM"; however, the accompanying Budget documents reveal that the Government will first consult on the abolition of stamp duty on shares quoted on growth markets such as AIM and the ISDX Growth Market, with a view to its removal during 2014. Accordingly, it will not be known whether transfers of shares in companies admitted to the HGS will be exempt from stamp duty until the Government publishes its response to the consultation later this year.
The continuing obligations which apply to a standard listed company, a company listed on the HGS or an AIM listed company are not generally as onerous as those which apply to a premium listed company. A comparison of the various regimes, including key similarities and differences, is attached as a schedule to this alert.
Companies with a premium listing must follow the UK Corporate Governance Code on a "comply or explain" basis. The UK Corporate Governance Code covers a range of topics, including the requirements for a company's CEO and chairman to be separate individuals, for a company's board to be made up of executive and non-executive directors, and for directors to retire annually. The remuneration of the directors is also required to be determined by a separate remuneration committee.
The rules do not require compliance with the UK Corporate Governance Code, merely disclosure and an explanation of any non-compliance. This disclosure is intended to enable shareholders to make their own assessment of a company's corporate governance practices. Investor representative groups in the UK, such as the Association of British Insurers (the "ABI"), the National Association of Pension Funds (the "NAPF") and Pensions Investment Research Consultants (the "PIRC"), seek to monitor compliance and publish reports on UK premium listed companies and issue voting recommendations to their members based on, amongst other things, the compliance by the company with the UK Corporate Governance Code. The UK Financial Conduct Authority (the "FCA") (formerly the Financial Services Authority) does not actively monitor the content of corporate governance statements, but, to the extent it does so, it is concerned to check that they are made rather than to judge the adequacy of either any explanation given or the corporate governance practices disclosed.
Companies with a standard listing, in the HGS or on AIM, do not have to comply with or explain against the UK Corporate Governance Code, although the HGS rules will require details of the corporate governance code to which the issuer is subject or voluntarily complies and statements of how that issuer has applied the main principles set out in that code and which provisions of that code the issuer has complied, or failed to comply, with. Also, market practice has emerged such that AIM investors do expect AIM companies to adopt some form of appropriate corporate governance standards.
In any event, all companies with listed shares or certificates representing shares (such as GDRs) must comply with the EU Company Reporting Directive (as implemented in the UK via the Disclosure and Transparency Rules). This requires the making of a corporate governance statement in the annual directors' report covering the governance code to which the company is subject in relation to the financial reporting process and certain details of share capital. The corporate governance statement must include a description of the board and its committees and the main features of the issuer's internal control and risk management systems.
Existing shareholders' rights of pre-emption
All premium listed companies must offer pre-emption rights to their existing shareholders when they issue shares (or sell treasury shares) for cash. The pre-emption requirement can only be disapplied by a resolution of shareholders, unless the issuer's home country has implemented Article 29 of the EU Second Company Law Directive – the provision on which the UK company law pre-emption requirement is based – in which case pre-emption can also be disapplied as allowed by national law. There is no set limit on the size of the disapplication. UK companies typically obtain an annual disapplication (a shareholder resolution requiring a majority of 75 per cent. or more) over shares representing 5 per cent. of their issued share capital in accordance with institutional investor guidelines, but this is not a Listing Rule requirement.
Whether companies in the standard listing segment, in the HGS or on AIM have to offer any pre-emption rights to their existing shareholders is a matter of domestic law (and, to an extent, what is considered customary and/or desirable from a marketing perspective). As noted above, under UK company law, companies are subject to pre-emption rights when they issue shares (or sell treasury shares) for cash unless they have received shareholder approval to disapply them.
Model Code for directors' dealings
The directors (and other persons discharging managerial responsibility) of companies with a premium listing are subject to the Model Code on dealings in securities. This, amongst other restrictions, prohibits dealings in securities during a "close period", which generally means the period of 60 days prior to the announcement of preliminary results or the publication of the annual financial report and, if the company reports on a half yearly basis, the time from the end of the relevant financial period until the publication of the relevant results. If the company reports quarterly, it is generally the period of 30 days preceding the announcement of the quarterly results.
Annual accounts and reports
A Main Market company must publish its annual financial report within four months of the financial year end. It must include audited financial statements, a management report and responsibility statements. The management report must include a review of the business and a description of risks and uncertainties facing the company. It must publish a half-yearly financial report within two months of the end of the first six-month period of the financial year. This must include a condensed set of financial statements, an interim management report and responsibility statements. The interim management report must contain details of important events during the first six months of the year and the principal risks and uncertainties for the rest of the year. Unless a Main Market company produces quarterly financial reports, it must produce an interim management statement during the first six months of each financial year and again during the second six months which must give details of material events and a general description of the company's financial position and performance. Companies on AIM must publish their annual financial report within six months of their financial year end and a half-yearly financial report within three months of the end of the first six month period of their financial year.
Shareholder approvals for significant or related-party transactions
Standard listed companies are also not required to seek shareholder approval for significant or related-party transactions. In contrast, premium listed companies and AIM companies require shareholder approval for certain transactions, as do HGS companies. Accordingly, this may make a standard listing more attractive to companies that are looking to make significant acquisitions.
Conclusions and anticipated future changes
The obvious question is why the LSE has now decided to create the HGS? It seems that the HGS is intended to be the launch pad for fast-growing European companies that are perhaps too large for AIM and unable (or unwilling at the time of listing) to satisfy the eligibility criteria for the premium or standard segments (notably the requirement to ensure that at least 25 per cent. of the shares are in public hands), but have longer term aspirations to hold a premium listing on the Official List. In this context it is interesting to note the UK Government's recent concern with technology companies opting for a listing on NASDAQ and that there have been no listings by European technology companies on the LSE's Main Market since 2010.
While the 10 per cent. minimum free float requirement applicable to the HGS is attractive as it does not require that existing investors relinquish control to outside investors upon listing, it remains to be seen whether there will be sufficient interest from investors, given the liquidity concerns in relation to other IPOs where the free float has been much higher. It is interesting in this context that the UKLA may proceed with its proposal to allow low free float levels for standard listings where there is sufficient liquidity. However, the requirement to have an historic annual compound growth rate of 20 per cent. or more over a three-year period may prove challenging given the economic circumstances that have prevailed since the financial crisis of 2008.
In short, the new HGS offers an additional financing route for companies and it may be an attractive option for certain EEA companies considering a premium or standard listing instead of seeking to trade on AIM or list on NASDAQ. While continuing investor caution and the steep growth pre-condition may limit initial enthusiasm for the HGS in the near term, companies which meet the requirements and investors looking for a regulatory regime more stringent than a standard listing may well find the HGS attractive.
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