Yesterday the UK Financial Conduct Authority (the “FCA”) published the final text of some significant changes to the Listing Rules.1 The changes, which will come into force on 16 May 2014, are intended to enhance the effectiveness of the UK listing regime, particularly in situations where the rights of minority shareholders are at risk of being abused, and to address concerns in relation to the potential influence of
controlling shareholders on UK listed companies, while ensuring that London remains an attractive listing
Over the last eighteen months, the UK market has seen several high profile governance failures involving
listed companies, some of which have had a controlling shareholder. At the same time concerns have
been expressed about London's ability to compete with other listing venues (including, principally, the US
markets) for significant IPOs, given the current requirement that not less than 25% of a listed company’s
shares must be held in public hands.
In light of this, in October 2012, the UK Financial Services Authority (as the predecessor body to the FCA)
published a consultation paper outlining various proposed changes to the Listing Rules.
2013, the FCA published feedback, near-final rules, and a new consultation.
affect the rules relating to the proportion of shares in a listed company which must be held in
public hands (the so-called “free float” requirement);
Listing Rules (Listing Regime Enhancements) Instrument 2014 (FCA 2014/33). See:
http://www.fca.org.uk/static/pubs/cp/cp12-25.pdf For a copy of our note on that consultation paper,
http://www.fca.org.uk/static/documents/consultation-papers/cp13-15.pdf. The FCA proposes to publish the
feedback statement in relation to this consultation on 16 May 2014.Fried Frank Client Memorandum
introduce new requirements where a listed company has a controlling shareholder, and in relation
to the procedure for appointing independent directors to the board and for cancelling the listing of
such a company; and
introduce additional Listing Principles to ensure (among other things) that shareholders have the
right to participate in the governance of the companies in which they are shareholders.
The key changes are outlined below.
The changes, which focus on the premium segment of the London market, have important implications for
the governance of UK listed companies which have a controlling shareholder, and, at the same time,
represent a response to the competitive challenge posed by other listing venues (including, principally,
the US markets). They are intended to balance the need to strengthen minority shareholder rights where
they are at the risk of being abused with ensuring that London remains an attractive listing venue for, in
particular, major overseas based companies. While the changes are to be welcomed, this is arguably an
intractable challenge, given the inherent difficulty of regulating the behavior of a rogue controlling
shareholder, especially where that shareholder is based in an emerging market. As a result, they
represent, at best, a partial solution.
As the FCA recently noted, the governance failures which led to the proposed changes have also caused
it to review its regulatory philosophy in relation to the listing regime more generally. In doing so, a key
issue has been who the FCA should treat as a “consumer,” given its statutory objective of protecting
consumers, and, specifically, whether index tracker investors should be treated as such (and, if so,
whether this calls into question the efficacy of the FCA’s disclosure-based regulatory regime for listing). It
is comforting to note that whilst ensuring the international competitiveness of London as a listing venue is
no longer one of the FCA’s statutory objectives, its proportionate and balanced approach in this regard
should serve to maintain London’s position as a leading capital market.
Shares in public hands
Currently, in order for a company to obtain a listing on the premium segment of the London market, at
least 25% of its listed shares must be held in public hands.
This is known as the "free float" requirement.
For this purpose, shares which are held by (among others) major shareholders or directors are not
treated as being held in public hands. The FCA may modify this requirement where it is satisfied that a
large number of shares of the same class, and the extent of their distribution to the public, will ensure a
properly functioning secondary market.
Some, largely buy-side, market participants had argued for a significant increase in the free float
threshold (to 50%, or in some cases, even higher) as a way of preventing controlling shareholder-related
corporate governance failures. The FCA has not done this. In its view, the free float requirement is
intended to ensure that a company's shares are sufficiently liquid, rather than as a governance tool, and
that to use it in that manner would risk turning minority protection into minority control, while at the same
LR 6.1.19R. A similar requirement applies in relation to companies seeking a standard listing. See LR 14.2.2R.
LR 6.1.20G.Fried Frank Client Memorandum
time seriously damaging London’s attractiveness as a listing venue. Instead, it has chosen to introduce
specific requirements in relation to (among other things) relationship agreements, board composition and
appointment, and shareholder voting. These are outlined later in this note.
So what has the FCA done in this regard? Essentially, the new rules introduce greater flexibility by
providing additional guidance on the circumstances in which it will be likely to relax the free float
requirement. The latter indicates that the FCA may modify the 25% free float requirement if it considers
that the market will operate properly with a lower percentage in view of the large number of shares of the
same class and the extent of their distribution to the public. In considering whether to do so, the FCA may
take into account (among other things) the number and nature of the public shareholders, and, in relation
to a company seeking a premium listing, whether the expected market value of the shares in public hands
will exceed £100 million (rather than £250 million, as originally proposed).
Under the new rules, shares that are subject to a lock-up period of longer than 180 days (rather than 30
days, as originally proposed) will not be treated as being in public hands.
The FCA's decision to not increase the free float requirement is to be welcomed. Any such increase
would have been likely to materially weaken London's attractiveness as a listing venue. The specific
changes outlined below represent a more sensible and proportionate approach to the governance
challenges posed by listed companies which have a controlling shareholder. At the same time, by giving
greater flexibility in relation to the free float requirement, the FCA is going some way to addressing the
concerns of the sell-side community in relation to the competitive pressures facing the London market
from other major global markets (including, principally, the US markets).
More generally, the new rules should be seen in the context of two related developments.
First, the recent changes made by FTSE to the eligibility criteria for inclusion in the UK Index Series.
These raised the free float requirement for UK issuers to 25%. This was intended, in part, to address the
concern expressed by some passive index tracker investors that they are being required to invest in
“substandard” premium listed companies. In contrast to the FCA, FTSE has therefore explicitly chosen to
use the free float requirement as a governance tool.
Second, the recent launch by the London Stock Exchange of the High Growth Segment of the Main
Market. To be admitted to the High Growth Segment, companies must have at least 10% of their shares
in public hands and the aggregate value of the shares in public hands must exceed £30 million, of which
the majority must be raised on IPO.
This provides an alternative option for companies that are reluctant
to meet the 25% free float requirement for admission to the premium segment and which are able to meet
the other criteria for admission.
Paragraphs 2.4-2.5 High Growth Segment Rulebook.
For a copy of our note on the High Growth Segment, see:
%20High%20Growth%20Segment_%20Note%201.pdfFried Frank Client Memorandum
Under the new rules, companies seeking a premium, as opposed to a standard, listing which have a
controlling shareholder (which, for these purposes, means any person who, together with persons acting
in concert with them, holds at least 30% of the shares or voting power of the company concerned) must
be able to operate independently of that controlling shareholder. To do so:
such companies will be required to put in place an agreement to govern the relationship between
the company and the controlling shareholder and to ensure that it is able to conduct its business
independently of that shareholder and their associates (a so-called "relationship agreement"); and
its constitution must require the election of independent directors to be approved by separate
resolutions of the company’s shareholders and of its independent shareholders (i.e., excluding
the controlling shareholder and concert parties).
These requirements are outlined below.
Under the new rules, where a company is seeking admission to the premium segment of the London
market, it must put in place a relationship agreement if it has a controlling shareholder. That agreement
must include provisions to ensure:
that all transactions with a controlling shareholder and their associates are conducted at arm’s
length and on normal commercial terms;
that a controlling shareholder and their associates abstain from doing anything that would have
the effect of preventing the company from complying with its obligations under the Listing Rules;
that the controlling shareholder and their associates will not propose a resolution to circumvent
the proper application of the Listing Rules.
Existing listed companies will have six months to put a relationship agreement in place.
Companies must comply with the terms of the relationship agreement at all times, and the relationship
agreement must remain in effect for so long as the company’s shares are listed and the company has a
The relationship agreement, or a link to where it may be found, must also be included in the company’s
annual financial report. Such reports must also include a statement by the directors that the listed
company has complied with the relationship agreement throughout the financial year, or, if it has not, a
description of the provisions of the agreement that have not been complied with and a confirmation that
the FCA has been informed of the non-compliance. Similarly, if the company does not enter into a
relationship agreement, the report must state that the FCA has been informed of the non-compliance.
If a company does not enter into a relationship agreement, or if the relationship agreement is breached by
the controlling shareholder, the company will also become subject to “enhanced oversight measures”.
Essentially, this means that every transaction between the company and the controlling shareholder (and Fried Frank Client Memorandum
their associates) will be treated as a related party transaction for the purpose of Chapter 11 of the Listing
Rules, and so require independent shareholder approval. Specifically, the exemptions under Chapter 11
for so-called “small transactions”, and for transactions in the ordinary course of business, will not apply.
The company will continue to be subject to these measures until the next annual report in which the board
gives a clean statement of compliance for the entire preceding financial year, with no dissent from the
All material amendments to the relationship agreement will require the approval of the independent
shareholders (i.e., the shareholders other than the controlling shareholder and their associates). In that
regard, such agreements will be treated in a similar way to an amendment of the terms of a related party
transaction under the Listing Rules.
Appointment of independent directors
Under the new rules, where a company which is seeking a premium listing has a controlling shareholder
its constitution must require the election of independent directors to be approved by separate resolutions
of the company’s shareholders and of its independent shareholders (i.e., excluding the controlling
shareholder and their associates). Again, this would be a continuing obligation.
If either of these resolutions is not passed, the company may propose a further resolution. That resolution
may be passed by a vote of the company’s shareholders as a single class. Consequently, a controlling
shareholder will still have the ability to block the appointment of an independent director.
While these requirements cannot fully address the governance challenges posed by controlling
shareholders in this regard, they represent a step in the right direction. In this context, it is interesting to
note that the FCA did not proceed with their original proposal that where a company which is seeking a
premium listing has a controlling shareholder, its board must comprise a majority of independent directors
or have an independent chairman and directors and independent directors who together comprise a
majority of the board. Such a requirement would have represented a material departure from the "comply
or explain" principle in relation to board composition and in relation to corporate governance more
generally under the UK Corporate Governance Code.
Currently, a company seeking a premium listing must demonstrate that it controls the majority of its
assets and that it will be carrying on an independent business as its main activity.
Both requirements are
Instead, the new rules focus on whether the company concerned carries on an
independent business and includes guidance on the factors that it will take into account in considering
whether this is the case.
Originally, the FCA had proposed that a company seeking a premium listing should be required to
demonstrate that it controls the majority of its business, rather than (as currently) its assets. This would
LR 9.2.2AR.Fried Frank Client Memorandum
have proved problematic for some applicants which have a genuine business and which function
independently. The FCA has therefore decided to not proceed with this change. Instead, the proposed
guidance on the meaning of “independent business” treats control of business as one element of a
principles-based assessment of whether the company carries on an independent business for this
purpose. The current requirement that the company must control the majority of its assets has therefore
The proposed guidance makes it clear that a company may be regarded as not being independent for this
purpose if (among other situations):
most of its revenue is attributable to business conducted with a controlling shareholder (or any of
it does not have strategic control over commercialization of its product(s), its ability to earn
revenue from it/them, and/or freedom to implement its business strategy;
it cannot demonstrate that it has or has had access to financing other than from a controlling
shareholder (or an associate of a controlling shareholder);
it has granted or may be required to grant security over its business in connection with the
funding of a controlling shareholder (or a member of that controlling shareholder’s group);
(except in relation to a mining company) its business consists primarily of holdings of shares in
entities that it does not control, including entities where it is only able to exercise negative control
or where its control is subject to contractual arrangements which can be altered without its
agreement or could result in a temporary or permanent loss of control; or
the controlling shareholder (or any of their associates) appears to be able to influence its
operations outside its normal governance structures or through material shareholdings in one or
more significant subsidiary undertakings.
The proposed guidance is helpful and is to be welcomed. Among other things, it is a useful reminder that
the fact that a company has entered into a relationship agreement with a controlling shareholder will not
necessarily be sufficient to satisfy the independence requirements under the Listing Rules in all
The guidance on the meaning of control in this context could, however, pose challenges for some
companies (including some real estate companies) which operate through material minority joint
ventures; and, as explained in our previous note, for those UK listed defence companies whose US
operations are operated by a proxy board.
%20Proposed%20changes%20to%20the%20UK%20listing%20regimeHow%20do%20you%20control%20a%20controlling%20shareholder.pdfFried Frank Client Memorandum
Under the new rules, where a premium listed company is required by certain provisions of the Listing
Rules to obtain the approval of its shareholders, including in relation to significant transactions or related
party transactions, this must be decided only by holders of shares that are themselves premium listed.
This is intended to prevent the use of share structures that allow such matters to be decided by the
holders of an unlisted share class. This requirement will, in exceptional circumstances, be subject to the
special share arrangements designed to protect national interests;
dual listed company voting arrangements; and
voting rights attaching to preference shares or similar securities that are in arrears.
Existing listed companies which have share classes which are not premium listed will have a two-year
transitional period in which to comply with this requirement.
Only a small number of listed companies have classes of shares which are not premium listed. The
proposed change is not, therefore, significant.
Currently, premium listed companies are required to comply with the Listing Principles, which are set out
in Chapter 7 of the Listing Rules.
The Listing Principles are designed to assist listed companies in
identifying their obligations under the Listing Rules and the Disclosure and Transparency Rules.
Under the new rules, premium listed companies will be subject to two additional Listing Principles. These
all equity shares in a class that has been admitted to premium listing must carry an equal number
of votes on any shareholder vote; and
where a company has more than one class of equity shares admitted to premium listing, the
aggregate voting rights of the shares in each class should be broadly proportionate to the relative
interests of those classes in the equity of the company.
These principles support, and should be seen in conjunction with, the specific requirements in relation to
shareholder voting described above.
In addition, standard listed companies will, for the first time, become subject to two of the Listing
Principles. These require that:
LR 7.1.3G.Fried Frank Client Memorandum
a listed company must take reasonable steps to establish and maintain adequate procedures,
systems and controls to enable it to comply with its obligations under the Listing Rules and the
Disclosure and Transparency Rules (i.e., what is currently Listing Principle Two); and
a listed company must deal with the FCA in an open and co-operative manner (i.e., what is
currently Listing Principle Six).
The two new Listing Principles for premium listed companies are unlikely to be relevant in many
circumstances. While the application of two of the Listing Principles to standard listed companies is to be
welcomed, it is disappointing that the FCA has not taken the opportunity to apply the other Listing
Principles to standard listed companies in the same manner, as they represent basic norms of behaviour
for any company wishing to raise capital in a public market (e.g., the requirement, under the current
Listing Principle Four, to communicate information to holders of its listed equity shares in such a way as
to avoid the creation of a false market).
Cancellation of listing
Under the current rules, a premium listed company must generally obtain the approval of the holders of
75% of its shares in order to cancel its listing.
Shareholder approval is not required to cancel the listing
of a standard listed company.
The new rules introduce a requirement that where a premium listed company has a controlling
shareholder, cancellation must also be approved by a majority of the votes attaching to the shares of
those independent shareholders voting on the resolution to approve cancellation of the listing.
On a takeover, a similar requirement will apply, based on acceptances. Essentially:
where the bidder is interested in 50% or less of the voting rights before announcing its firm
intention to make the bid, the current regime will apply (i.e., acquisition of issued share capital
carrying 75% of the voting rights of the issuer will be required in order to cancel the listing); and
where the bidder is interested in more than 50% of voting rights before announcing its firm
intention to make the bid, it will need to obtain acceptances, or acquire shares, from independent
shareholders that together represent a majority of the votes held by independent shareholders, in
addition to reaching the 75% acceptance threshold, in order to do so.
In the latter case, if the bidder has acquired, or agreed to acquire, more than 80% of the listed class of
shares, then no further approval of acceptances by independent shareholders should be required to
cancel the listing.
The proposed changes are sensible and are to be welcomed