On 16 May, changes to the Listing Rules came into effect with the aim of enhancing the listing regime and addressing governance issues at premium listed companies with a controlling shareholder.
The new rules are the subject of a policy statement (PS14/8) and are broadly those set out in the FCA’s response (CP13/15) to its consultation on enhancing the effectiveness of the Listing Regime (CP12/25), as published in November 2013.
The most interesting points relate to:
Relationship agreements – these will be mandatory for premium listed companies where there is a controlling (30% or more) shareholder. If the relevant rules are not complied with then all transactions with the controlling shareholder and its associates will be subject to prior independent shareholder approval under Listing Rule 11, irrespective of size or nature, pending the next annual report in which the board can make a clean statement of compliance with the relationship agreement.
Introduction of a dual-voting structure – subject to certain limitations, independent directors of premium listed companies with a controlling shareholder are to be elected with the approval of both the shareholders as a whole and the independent shareholders. There will also be enhanced disclosure requirements for independent directors.
Key rule changes
1. Controlling shareholders
New rules have come into force for premium listed companies with “controlling shareholders”. For the purposes of the Listing Rules, “controlling shareholder” means, broadly, any person who exercises or controls on their own, or together with any person with whom they are “acting in concert”, 30% or more of the voting rights of a premium listed company. “Acting in concert” is not defined. The FCA has said that it is unlikely that its conclusion as to who was acting in concert in a particular situation for Listing Rules purposes would be different from the Takeover Panel’s in the context of the Takeover Code.
- Relationship agreements – premium listed companies must now have a relationship agreement with their controlling shareholders. Where a company has more than one controlling shareholder (which may be quite likely given that parties acting in concert are caught), it will not have to enter into a separate agreement with each one if it reasonably considers, in light of its understanding of the relationship between the relevant controlling shareholders, that the signing controlling shareholder can procure the compliance of any other controlling shareholder and its associates with the mandatory independence provisions that must be contained in the relationship agreement. The agreement must also contain the names of the non-signing controlling shareholders. The three required independence provisions are:
- transactions and arrangements with the controlling shareholder (and/or any of its associates) will be conducted at arm’s length and on normal commercial terms;
- neither the controlling shareholder nor any of its associates will take any action that would have the effect of preventing the company from complying with its obligations under the Listing Rules; and
- neither the controlling shareholder nor any of its associates will 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.
Existing listed companies with controlling shareholders have until 17 November 2014 (i.e. six months from when the new rules came into force) to put a compliant relationship agreement in place, or to amend an existing relationship agreement to make it compliant. Where either the amendment of an existing relationship agreement or entry into a new one is intended solely to address the requirements of the new rules, the FCA has confirmed this will not be treated as a related party transaction and so will not require an independent shareholder vote. It has also clarified in PS14/8 that the arm’s length and commercial terms requirement in these provisions will apply only to transactions entered into after the new rules came into force.
The FCA has indicated in PS14/8 that the aim of the independence provisions is not to prevent controlling shareholders from engaging fairly with a company or to prohibit them from legally disagreeing with the company. Its view is that the provisions will not prevent shareholders from exercising their rights as shareholders, but that they seek to prevent influence being exercised improperly and in a way that is detrimental to minority shareholders. In particular, the FCA expressly states that it will not view accepting or making a takeover offer, giving an irrevocable undertaking or purchasing shares in the market in connection with a takeover offer as being prevented by the independence provisions.
- Disclosure of compliance with independence provisions - the existence of, and compliance with the independence provisions in, the relationship agreement need to be disclosed in the company’s annual report. The company’s statement regarding compliance by a controlling shareholder need only be made so far as the company is aware. If there is non-compliance with the independence provisions the rules provide that the listed company should consider cancelling its listing or transferring to the standard listing segment. Delisting would seem to be a perverse response to a situation brought about by non-compliance with minority protection provisions.
- Enhanced oversight regime - where there is no relationship agreement, a controlling shareholder breaches the independence provisions in the agreement or an independent director disagrees with the board’s assessment of whether the independence provisions have been complied with, all transactions between the relevant controlling shareholder and the company, regardless of their size, will require independent shareholder approval until the next annual report in which the board can make a clean compliance statement. In response to feedback that the time a company may have to spend being subject to the “enhanced oversight measures” may be disproportionate to the breach, the FCA has indicated in PS14/8 that it will keep this aspect under review and will consider changing its approach if it seems appropriate once the new rules have had time to bed down. It has however said that it expects that if a company enters the enhanced oversight regime, the types of transactions that could continue to be treated as ordinary course will be discussed and agreed with the FCA upfront.
- Dual-voting structure for independent directors – where a premium listed company has a controlling shareholder, directors whom the company has determined to be independent under the UK Corporate Governance Code will be elected using a dual-voting structure. Their election will need to be approved by the shareholders as a whole and by the independent shareholders (i.e. excluding any controlling shareholder). PS14/8 clarifies that separate votes are not, however, necessary if the votes of independent shareholders can be identified on a single vote. If the vote fails to achieve the necessary majorities the company must hold a second vote after 90 days (with the vote being held within 30 days of the end of the 90 day “cooling off” period), with that vote requiring a simple majority of all shareholders, including the controlling shareholder. This aims to give the minorities a voice without turning a minority right into minority control. An existing listed company can allow an existing independent director who is being proposed for re-election (including a director who has been appointed to the board until the next AGM) to remain in office until the dual-voting procedure has been carried out.
A shareholder circular for the election of an independent director will need to contain additional disclosure on any previous or existing relationship between the independent director and the controlling shareholder. The disclosure required is not limited by time or materiality as the FCA wishes shareholders themselves to form a view as to what is material. This is in line with its view that it is the quality not the quantity of independent directors that is important. The FCA has indicated in PS14/8, however, that it is comfortable that less material and more extensive dealings can be described in general terms.
The rules provide for a transitional period, until the next general meeting for which notice is given after 16 August 2014, to allow premium listed companies time to amend their articles of association, if necessary, to provide for the election of independent directors by a dual-voting structure. The FCA clarified in PS14/8 that premium listed companies are not required to amend their constitution to comply with the dual-voting requirements for independent directors as long as their constitution does not prohibit such elections from taking place. Whether a company needs to amend its articles is likely to be context-specific, with market practice evolving on the changes that need to be made. We would be happy to discuss our view on whether and when changes are likely to be necessary.
2. Free float
Despite earlier discussions in this area, the new rules do not seek to increase corporate governance through the free float requirements.
There is no change to the minimum free float level of 25%. The FCA remains able to show some flexibility for companies with sufficient liquidity. Shares subject to a lock up of longer than 180 calendar days (extended from the 30 days originally proposed in CP12/25) will be excluded from the free float calculation for companies with a premium or standard listing of shares or a standard listing of GDRs. No distinction is made between soft and hard lock-ups as defined in the recent ABI guidance on lock-ups.
The new rules include guidance on the criteria that the FCA will take into account when determining whether the market will operate properly where less than 25% of a premium listed company’s shares are held by investors in the EEA. In many cases, this codifies existing practice. The FCA may take into account shares of the same class that are held (even though they are not listed) outside the EEA, the number and nature of the public shareholders and, in relation to commercial companies with a premium listing, whether the expected market value of the shares in public hands at admission exceeds £100 million.
3. Other new continuing obligations
The new rules make a number of other changes in this area.
- Listing Principles – the Listing Principles have been split to comprise two Listing Principles (old Listing Principles 2 and 6) applicable to all listed companies (including standard share, GDR and debt issuers) and six Premium Listing Principles for premium listed companies only. The Premium Listing Principles include two new provisions designed broadly to prevent attempts to introduce super voting shares or artificial voting structures designed to allow control to rest with a small group of shareholders, which are likely to be relevant only to a small number of issuers.
- Whistleblowing obligation - premium listed companies are now required to notify the FCA without delay of a breach of certain continuing obligations. These include the obligation to operate an independent business and, where relevant, to have a relationship agreement and a dual-voting structure for the election of independent directors.
- Smaller related party transactions - premium listed companies must now announce smaller related party transactions (those that do not require specific shareholder approval) at the time they take place and not wait to disclose them in the next annual report. In addition, sponsors need to provide their written confirmation that a smaller related party transaction is fair and reasonable so far as shareholders are concerned to the company rather than to the FCA. We have given some thought to whether this means that additional assumptions may be able to be included in the letter (along the lines of fairness opinions and as permitted in the context of larger related party transactions under Chapter 13 of the Listing Rules). The FCA has confirmed that the form of the letter should not change.
4. Cancellation of listing
In addition to the existing 75% approval, cancellation of a premium listing requires the additional approval of a majority of the votes of the independent shareholders holding premium listed shares, subject to certain exceptions in relation to takeover offers.
5. Independence/control of business
The rule that an applicant seeking a premium listing must demonstrate that it controls a majority of its assets has been deleted leaving only the requirement that the company must be able to demonstrate that it will be carrying on an independent business as its main activity. The Listing Rules now also set out factors that may indicate that a new applicant does not satisfy this requirement.
All companies with a premium listing should monitor their shareholder register to ensure timely identification of controlling shareholders (including concert parties). Companies with controlling shareholders that have, or are seeking, a premium listing should:
- enter into a relationship agreement, or amend any existing agreement to include the required independence provisions. Premium listed companies with a controlling shareholder (or that acquire one after admission) have six months to put a relationship agreement in place;
- put in place procedures for the new independence disclosure in their annual report; and
- review their articles to confirm they do not prohibit use of a dual-voting structure for the election of independent directors and consider whether there is any other reason to make an amendment.
We would be happy to discuss these changes with you in more detail. If that would be helpful, please get in touch with your usual contact or any of the partners in our capital markets team.