From 1 July 2018, sovereign controlled companies will be able to admit their securities to listing on a new dedicated category of the FCA's premium listing regime.

What has happened?

Sovereign Controlled Companies: Feedback to CP17/21 and Final Rules (PS18/11)" which announces a new premium listing category for commercial companies that have a sovereign controlling shareholder. The rules will be set out in a new Chapter 21 of the Listing Rules (LRs) which will take effect on 1 July 2018.

Why is there a new premium listing segment?

Last July, the FCA published consultation paper 17/21 (CP 17/21) which set out its proposals to create a new premium listing category for sovereign controlled companies. Click here to read our summary of the proposals.

A gap in the market for sovereign controlled companies

In CP 17/21, the FCA explained that it had identified a gap in the UK listing regime for those companies which exceed the basic obligations of a standard listing and which aspire to meet the higher governance standards of a premium listing. The FCA recognised that these companies are often controlled by a sovereign country shareholder which tend to differ from typical 'private sector shareholders' in their structure, activities and, more importantly, their motivations. It was thought that certain LRs which seek to protect investors from the influence of controlling shareholders may not be appropriate for sovereign controlled companies. Consequently, the FCA proposed a new designated category for such companies.

PS18/11 sets out the FCA's feedback to the responses received during the CP 17/21 consultation and how the FCA proposes to modify its original proposals (which we outline below).

Which companies are eligible for a premium listing in the new category?

A commercial company with a shareholder that is a sovereign country (such shareholder to be defined as a 'State' in the LRs) which controls 30% or more of the voting rights of that company will be eligible to list its equity shares or depositary receipts over its equity shares (DRs) on the new category of the premium segment.

Which premium LRs will apply to the new category?

The existing premium LRs will apply to issuers listing their securities on the new category, save for two important modifications.

Issuers will not be required to:

enter into a controlling shareholder agreement (as currently required by the controlling shareholder provisions in the LRs) with the sovereign controlling shareholder (due to practical difficulties typically experienced by sovereign controlling shareholders when entering into such agreements due to their nature and structure); and
obtain an advance sponsor opinion or advance approval by independent shareholders of related party transactions with the sovereign or its associates as required under the related party rules in LR 11 - the FCA considers that these rules would impose a disproportionate burden on such issuers due to their complex relationships with their sovereign controlling shareholders.

Some tweaks to the final rules

The FCA is proceeding with the majority of its proposals set out in CP 17/21 (which we summarise here) and has made some amendments following feedback received during the consultation. Key amendments include:

- providing that issuers must still announce transactions with their sovereign controlling shareholder as required under LR 11. Additionally, the FCA clarifies that, for the purpose of the aggregation rules for smaller and small related party transactions, the announcement of such transaction (rather than the obtaining of shareholder approval, as in the case of other premium listed companies) will constitute the "cleansing" event that resets the aggregation process. The final rules will also retain the LR 12 rules on the repurchase of own shares by a company from its sovereign controlling shareholder so that the company must comply in full with the related party provisions in LR 11 as regards any such transaction;
- providing that the election of independent directors is subject to separate approval by independent shareholders. The final rules now provide that, as for other premium listed issuers, where independent shareholders do not vote in favour of the election, the requirement for a 90 day cooling-off period will apply after which the election can proceed subject to a vote of all of the shareholders; and
- providing for an explicit eligibility condition and matching continuing obligation to reinforce its original proposals that the rights attaching to the underlying equity shares must be capable of being exercised by the holders of DRs as if they were holders of the equity shares. Issuers must also ensure that they have arrangements in place to enable those DR holders to exercise their rights.

Modified premium LRs - but expectations of good governance remain

Whilst the LRs have been modified to enable sovereign controlled companies to seek a premium listing, the market is likely to expect such issuers to maintain the same high standards of corporate governance as it expects of other 'controlled' premium listed companies. Consequently, the disclosure of any transaction between an issuer and its sovereign controlling shareholder (that is not a 'significant transaction' which will remain subject to prior shareholder approval pursuant to LR 10) is likely to be subject to close scrutiny. In the absence of being required to seek advance approval of a sponsor or its independent shareholders, a company may wish to consider what internal measures could be implemented to ensure that the terms of all transactions with its controlling sovereign shareholder are 'fair and reasonable'. Clearly, the board will also need to comply with its own fiduciary duties when considering a relevant transaction - and the FCA has made it clear (in the final rules and in PS 18/11) that the issuer's independent directors will have a critical role to play in safeguarding the interests of the independent shareholders.

It will be interesting to see whether the new category is successful in attracting international issuers to listing in London. The FCA indicated in the consultation document that a passive stake held by a sovereign wealth fund would be unlikely to meet the requirement for "State" control but they do not comment on this in PS 18/11 – so it remains to be seen whether companies of this kind would qualify.

Also, as the FCA notes, most sovereign controlled companies wishing to pursue a listing in the new category will not automatically qualify for FTSE UK index inclusion under the current FTSE rules, as they will need to meet other stringent criteria if they are not UK incorporated (such as a higher 'free float' requirement and specific liquidity tests) which may be difficult for a number of sovereign controlled companies to satisfy. The FCA has supervisory oversight over UK-based index providers like FTSE but the rules for inclusion are set by the index providers. FTSE inclusion is considered to an important advantage for premium listed issuers and it is possible that ineligibility for the index may deter certain companies from seeking a listing in the new category.