Capital Markets Group: PLC Update
Review of UK Listing Regime
The UK Government has recently published its report on proposals to make changes to the UK listing regime. The report follows a consultation exercise chaired by Lord Hill that was kick started back in November 2020,
when HM Treasury published its "Call for Evidence- UK Listings Review" paper, in which it sought views on potential changes to various areas of the listing regime which may assist with boosting the number of new companies seeking to list in London.
With the UK finding itself in a post-Brexit era in which the UK's financial services sector does not form part of the UK's trade deal struck with the EU at the end of 2020, the UK Government considers this to be an opportune time to look at the existing listing regime with a focus on attracting more IPOs on the London stock market, especially high-growth companies in the technology sector. The UK Government believes that the ability to deviate from the European Union's financial regulation offers the potential to create a regime for the UK that is more flexible and agile in the current environment. This also comes against the backdrop of other exchanges internationally, competing fiercely against each other in order to attract companies to list and the perceived need to increase the UK's competitiveness in this area.
The following key areas were consulted on as part of the review and for which Lord Hill has now made recommendations in his report:
Dual class share structures. Companies on some overseas exchanges are able to issue a separate class of shares alongside its ordinary shares with differential rights, known as a Dual Class Structure or "DCSS". This can involve the issuance of shares with multiple or enhanced voting rights (often to the company's founders and which are sometimes called "Founder" or "Golden" shares) or with no voting rights attached to them at all. These then sit alongside ordinary shares in issue with a traditional one vote per share held. Currently, the Listing Rules for the LSE Main Market's Premium Segment do not allow for DCSS. The Hut Group PLC's listing in 2020 created a stir by adopting a DCSS with a separate class of shares and associated share incentive scheme issued to the key founder of the business which would enable him to block a hostile takeover in certain situations. However, the listing was only permitted to proceed by way of a Standard, rather than Premium listing on the London Stock Exchange. The consultation questioned, therefore, whether Premium listed companies should be able to issue and list DCSS structures and if so, with what limits, bearing in mind the potential benefits and risks for investors and the need to maintain high standards of corporate governance.
Key Recommendations: The report recommends the FCA should permit the creation of DCSS structures on LSE Main Market's Premium Segment. However, this should be subject to certain conditions in order to maintain good corporate governance standards and would include:
A maximum duration of five years for the DCSS structure to remain in place.
A maximum weighted voting ratio of 20:1- so as to make sure that the holders of weighted voting rights need to have a minimum economic interest in the company.
Requiring holders of B class (enhanced voting right) shares to be directors.
Voting being limited to ensuring that the holders are able to continue as directors and to block a change of control of the company while the dual class share structure is in force.
Limitations on transfer of the B (enhanced voting right) class shares.
Bird & Bird Experience
Bird & Bird International ECM team benefits from having practitioners across some of the world's key capital markets. Our teams in Hong Kong and Amsterdam are already familiar with Dual Class structures and our clients can benefit from their experience:
James Fong, Partner in our Hong Kong office comments as follows:
"The decision by Alibaba Group, the world's largest retailer and e-commerce company, to pursue its record breaking initial public offering on the New York Stock Exchange instead of Hong Kong in 2014 due to the Hong Kong Stock Exchange's "one-share-one-vote" rule at the time prompted a debate as to the need for reform to compete with Nasdaq and the New York Stock Exchange to attract more listings from new economy issuers. After a period of consultation, the Hong Kong Stock Exchange unveiled new listing rules welcoming innovative companies with weight voting rights, as well as making secondary listings easier for innovative Chinese companies listed on the New York Stock Exchange, Nasdaq or the premium segment of the Main Market of the London Stock Exchange (including those with weighted voting rights structures).
The new listing rules led to a surge in listings of technology companies with weighted voting rights, and have cemented Hong Kong's place as a key listing venue for new economy companies. Since the adoption of the new rules, we have seen the listings of several Chinese behemoths with weighted voting rights on the Hong Kong Stock Exchange, including the initial public offerings of Meituan Dianping, one of the world's largest online and on-demand delivery platforms, Kuaishou Technology, a Chinese video sharing mobile app with a strong user base outside China's tier 1 cities, and Xiaomi Corporation, China's largest smartphone company, as well as the secondary listings of Alibaba Group, JD.com, one of the largest online retailers in China and Baidu, one of the largest AI and Internet companies in the world. To date, innovative companies with weighted voting rights have raised over 313 billion Hong Kong dollars on the Hong Kong Stock Exchange since the promulgation of the new listing rules."
Michiel Wurfbain, Partner in our office in the Hague, who advises clients on Euronext in Amsterdam comments as follows:
"The Dutch market is quite familiar with dual class structures. The anti-takeover protection mechanisms that Dutch listed companies often have are commonly based on a specific class of shares preference or priority shares. Whilst these structures aim to protect a listed company to hostile take overs, there are also a number of Euronext Amsterdam companies that have a dual class structure that vest enhanced founder control. The flexibility of Dutch corporate law in combination with Euronext Amsterdam's generally being a non-restrictive venue create a lot of structuring possibilities for companies seeking a listing in Amsterdam"Jolie Giouw, Counsel in our Singapore Office, comments as follows:
"The SGX welcomed its first dual class structure listing in 2020 through a secondary offering of a New York Stock Exchange listed company, after this listing regime was introduced in 2018. This paves the way for a more vibrant market and potential for more product offerings. The SGX rules in connection with such dual class structure listings strike a balance between providing investor confidence on corporate governance with prescriptive but appropriate safeguards addressing expropriation and entrenchment risks, and allowing founder-entrepreneurs a more flexible route to tap on the capital markets in Singapore."
Free float. At present, the UK Listing Rules require those companies that are seeking a listing on the Premium segment of the Main Market of the London Stock Exchange to have at least 25% of the company's shares in public hands in order to list (called the "free float"), although the FCA does have the ability to accept a lower level on a discretionary basis if it considers the market will still operate properly. Shares considered not to be held in `public hands' include, among other things, the interests of directors of the issuer (or persons connected to them) and person who holds an interest of 5 per cent or more in the issuer. The report considers that these requirements are one of the biggest deterrents for companies seeking to list in London, especially high-growth and private equity backed companies.
The report recommends that:
The free float requirement should be reduced from 25% to 15% for all companies seeking to list on either the premium and standard segment of the Official , as well as allowing companies of different market caps to use alternative measures of liquidity other than an absolute free float percentage (e.g. companies with larger market caps could, as an alternative to complying with the 15% threshold, demonstrate that they have a minimum number of shareholders, a minimum number of publicly held shares, a minimum market value of publicly held shares and a minimum share price to support a liquid market)
The definition of "shares in public hands" should be reviewed and updated to reflect whether the shares are in fact contributing to liquidity (e.g. increasing the threshold above which investment managers and other institutional shareholders are excluded from contributing towards the free float calculation from 5% to 10% and excluding any shareholders who are subject to lock- up agreements of any duration that mean those shares are not realistically accessible as part of the regular liquidity pool).
Rules relating to Special Purpose Acquisition Vehicles (SPACs)
Special Purpose Vehicles (or SPACs) are cash shell companies formed with a view to making an acquisition. They have been particularly popular of late in US stock market listings, although they have had a mixed experience to-date in London. The main deterrent to SPACs listing on the London markets (and this applies to AIM as well as the Main Market) is the requirement for the shares in the SPAC to be suspended as soon as a deal is announced to the market. This could leave investors locked into the stock for a long period of time without the ability to trade while the SPAC is preparing a new listing document to re-list the enlarged group.
The Review recommends that the requirement for trading in the shares of SPACs to be suspended upon the announcement of a potential acquisition should be revised and that additional protections be provided to shareholders of the SPAC, such as:
the information that SPACs must disclose to the market upon the announcement of a transaction in relation to a target company;
the rights that investors in SPACs must have to vote on acquisitions prior to their completion;
the rights that investors in SPACs must have to redeem their initial investment prior to the completion of a transaction; and
if necessary, to safeguard market integrity, the size of SPAC below which the suspension presumption may continue to apply.
Bird & Bird Experience
The plethora of SPAC listings in the US has prompted a number of exchanges to review their own rules. Hong Kong, for example is undertaking a similar listing review.
Our office in Singapore is familiar with SPAC structures as they are already permitted on the SPX.
Jolie Giouw, Counsel, in our Singapore office comments:
"The Singapore Stock Exchange has announced in early 2021 that it intends to publish a consultation paper for the listing of SPAC structures by the first quarter of 2021, with the hopes of listing such structures as early as this year if they are able to get enough support from the industry. This is the second time the SGX has floated the concept, after an aborted attempt more than 10 years ago in 2010 when public consultation feedback showed that there was not enough appetite among business and investors back then. However, market conditions have evolved in the last 10 years, and if successful, Singapore would be Asia's first major stock market to allow SPAC listings."
The first Euro-SPAC also recently listed on Euronext Amsterdam and partner, Michiel Wurfbain, comments as follows:
"In 2007, the first SPAC ever to list in Europe listed in Amsterdam. To date six SPACs listed on Euronext Amsterdam and a number of additional Euronext Amsterdam SPAC listings have been announced, making Euronext Amsterdam one of the most prominent venues from SPAC listings in Europe. Euronext Amsterdam has become the venue of choice because of its high liquidity and flexibility."
Rebranding of the Standard Segment
The report believes that a re-branding and re-marketing of the Standard Segment of the Official List should occur. The desire behind this is to promote London as a venue for all types of companies to list and with the hope that the flexibility the Standard Segment offers will attract an increasingly large cluster of similar companies and thereby attract further listings of those types of companies. In particular, the report recommends that a "standard listing" be renamed as a "Chapter 14" or "Main Segment" listing. Investor groups should also be encouraged to develop guidelines that would allow for companies on this segment to be eligible for inclusion in indexes.
Prospectuses. All companies seeking to list (whether by way of a premium or standard listing route) are required to prepare a prospectus. Furthermore, a company seeking to make a public offering of its shares or if it seeks to issue shares which cumulatively with all other shares issued over the previous 12 months represents more than 20% of its issued share capital must publish a prospectus. The consultation sought views as to whether the prospectus requirements and situations in which prospectuses are required are currently appropriate or whether the prospectus requirements could better reflect UK markets and their issuers. Following the consultation, the report recommends a fundamental review of the prospectus regime in light of the fact that prospectuses have ballooned in size with a consequent reduction in their usefulness. The outcome of that review should be that companies that are already listed should be completely exempt from the requirement to produce a follow-on prospectus or be subject to much slimmed down content requirements. In particular, the review should take into account the following areas:
Changing the prospectus requirements so that in future, admission to a regulated market and offers to the public are treated separately.
Changing how the prospectus exemption thresholds function so that documentation is only required where it is appropriate for the type of transaction being undertaken and suits the circumstances of capital issuance.
Using alternative listing documentation where appropriate and possible, for example in the event of a further issuance by an existing listed issuer on a regulated market.
Track record requirements. The Listing Rules require all companies seeking a premium listing to have a proven track record of earning revenue and for it to be underpinned by a business model that is profitable and sustainable, as well as 3 years of historic accounts covering at least 75% of its business. The track record requirements are intended to ensure prospective investors can make an informed assessment of a business that is seeking to list and to give confidence that the business will be sustained into the future. The review consulted as to whether these premium listing track record requirements may present a barrier for certain types of company from listing and whether, if so, the UK should allow greater flexibility in this area.
The responses received did not indicate that the three year track record requirement necessarily acts as an impediment to listing in itself and therefore recommended that they be retained for premium listing segment companies. However, the current provisions for scientific research-based companies regarding revenue earning requirements should be extended to apply to a wider range of high growth, innovative companies across a variety of sectors.
The requirement for the historical financial information covering at least 75% of an issuer's business for premium listings should be amended to a test that is only applicable to the most recent financial period within the three-year track record. This would reduce the period of disclosure from three to two years for acquisitions made in the last financial period.
At present, companies are unable to provide forward-looking information on IPOs without attracting liability, which affects the potential valuation and equity story. The report therefore recommends that the liability regime associated with prospectuses should be changed so as to enable issuers and their directors to publish and stand behind their forward-looking models. The report suggests this could be achieved by issuers/directors being given a defence where they had exercised due skill, care and diligence in putting the forward information together and provided that they honestly believed it to be true at the time at which it was published. This would enable investors to receive higher quality information upon which to base their investment decision.
Dual listings. Certain companies seek to have a dual or secondary listing (i.e. list their securities on exchanges in two different jurisdictions) in order to benefit from access to greater pools of investors, specific sectoral expertise, or enhanced international profile. It can allow for continued trading across multiple time zones as well. The consultation asked whether the requirements for dual listed companies to comply with the listing requirements of both markets presents a barrier to listing in the UK and whether anything could be changed to encourage more dual listings. The report recommends that the existing regime within the Listing Rules for secondary and dual listings should be maintained but, as part of the review of the prospectus regime referred to above, consideration should be given as to whether prospectuses drawn up under other jurisdictions' rules (which are regarded as being of an equivalent standard) can be used to meet UK requirements.
Rules on research by unconnected analysts to be revisited
Rules introduced in 2018 under the EU Markets In Financial Instruments Directive (MIFID II) require "unconnected" research analysts (i.e. those who are not connected to an IPO as they are not employed by banks advising a company on its IPO) to withhold publication of their research for 7 days following the release of an intention to float announcement and the publication of the company's prospectus/registration document. The rules were aimed at promoting access to unbiassed and independent research on companies coming to market. However, the report found that this has not led to a significant increase in the amount of research produced by "unconnected" analysts and, if anything, has led to unintended detrimental consequences including cost, time implications and an increased execution risk as well as the fact that unconnected analysts are not being briefed at the same time as connected analysts due to the risk of a leak occurring. For these reasons, the report recommends that the FCA should consider abolishing or amending the rule.
Empowering retail investors and improving capital raising for existing listed issuers
The report acknowledges that there is a new generation of retail investors who will expect smoother processes for registering their views as shareholders. The report recommends that the government should consider the use of technology to improve retail investor involvement in corporate actions.
In terms of the efficiency of raising further capital by listed issuers, the report makes a number of recommendations designed to facilitate quicker and more efficient processes. In particular, the government should consider re-establishing the Rights Issue Review Group and its outstanding recommendations in terms of capital-raising models used in other jurisdictions and taking advantage of technological advances (e.g. an accelerated rights issue like the Australian RAPIDS model).
Annual Report on the State of the City. The report recommends that the Chancellor should present his view on the "State of the City" each year to Parliament in which he sets out the steps that have been taken or are to be taken in order to promote the UK's attractiveness as a well-regulated global financial centre, with dynamic capital markets and a strong ecosystem that attracts the growth companies of the future.
Conclusions and next steps
The consultation has highlighted a divergence in views across the City between those keen to uphold the UK's gold-plated standards in order to maintain investor confidence in the companies seeking to list and those that think even more fundamental reforms are required to attract new fast-growing companies to list in London.
Overall, the recommendations contained in the report are likely to be welcomed by most participants, given that they are designed to increase the competitiveness of the UK listing regime.
Nick Heap and Clive Hopewell comment:
"There has been a lot of focus on the US markets for tech IPOs over the past 2-3 years. That said, London still remains one of the world's most international markets, both in terms of the companies listed and the investor base, and the recent SPAC proposals by the government will only enhance London's attractiveness as a listing venue further.
Private equity has taken the lion's share of the UK's most exciting technology companies for a long time. These new government proposals will provide management teams with more options for funding by opening up new routes to listing, via a SPAC or a dual class structure, so UK investors can have more opportunities to participate in some of these growth stories.
London was perhaps a bit slower off the mark when we introduced the old Chapter 25 of the Listing Rules, which enabled the first dot.com companies to list on the LSE back in 2000 but the advantage was that lessons had been learned from our US friends and there were far fewer failures here when the bubble burst and a good number of those companies are still with us today in some shape or form. Similarly, with the SPAC structures, we can adopt some of the key commercial principles but adapt them to suit the expectations of the London market."
The UK government will examine Lord Hill's recommendations closely and set out its next steps. Quite a few of the proposals will require the FCA to consult on them separately as they will involve amendments to their own rules. Where appropriate, the FCA aims to publish a consultation paper by summer 2021, with the relevant rule changes to be incorporated by late 2021. It is worth noting that the FCA responded to Lord Hill's consultation, indicating its support for the proposal for a fundamental review of the legislative framework for the prospectus regime and that it will therefore work closely with the government and market participants to discuss and develop suitable policy options.
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