Lord Hill’s keenly awaited report on the UK’s listing regime was released on 3 March 2021. Many of his recommendations focus on the premium listed segment, and much of the commentary to date has focussed on recommendations such as permitting dual-class share structures.

However, the report includes a number of proposals which if implemented may make the Official List more appealing to smaller companies, which we have highlighted below. Lord Hill has also been clear that while he considers his review of the listing rules to be important further consideration will need to be given to how the UK can strengthen its whole capital markets ecosystem. Substantial change is clearly coming.

CHANGE OF THE FCA’S OBJECTIVES

The report recommends that the FCA’s objectives be changed to give it a duty to take into account the UK’s overall attractiveness as a place to do business.  This is common for overseas regulators, but has not been something the FCA has had to formally consider before.  The hope is that imposing this objective will result in regulation which is dynamic and flexible, evolving as circumstances change.  Hopefully this will result in regulation which is more appropriately weighted to the status and risk profile of smaller companies, and make it easier and more cost effective for them to list.

REBRANDING THE STANDARD LISTING SEGMENT

Lord Hill’s view is that the standard listing segment currently has an identity and branding issue, as it was not established as a place to list companies of a particular size or type.  To make the segment, which is the natural home of smaller companies on the Main Market, more appealing he has recommended that it be re-branded and promoted as a venue for all types of company to list in London with a real emphasis on flexibility.  The idea is that while the FCA continues to ensure minimum standards investors will drive best practice, often through investor groups publishing industry guidelines.  Individual issuers will have to justify non-compliance with this best practice in order to attract investment, and resulting in them holding themselves to high standards.  This level of flexibility is likely to be very attractive to smaller issuers, who will be able to do what they consider in the best interests of themselves and their investors.  In the long-term Lord Hill hopes that this attractiveness will result in clusters of similar companies listing on the segment, creating momentum and making it even more attractive for future listings.  This could well include some tech business like those London has lost to overseas exchanges in the past few years as well as those in newly developing sectors.

Additional proposals to improve the attractiveness of the segment are:

  • to allow companies listed on it to be included in indexes, which may be helpful for larger issuers but is unlikely to assist very small ones unless specialist indexes for their business areas are developed; and
  • changing the name of the segment perhaps to the “Main Segment” or by way of reference to a “Chapter 14 Listing”.  While a re-naming may help with the wider rebrand the new name will need to be carefully chosen to ensure it is appealing to investors.  Our view is that referring to Chapter 14 of the listing rules is overly technical and is likely to be off-putting to smaller and retail investors.

REDUCTION OF FREE FLOAT REQUIREMENTS

Currently the listing rules require shares in public hands (the “free float”) of a company to be at least 25% of the company’s issued shares of the listed class. This is intended to ensure liquidity in the shares, but Lord Hill concluded that the current rules are a strong deterrent to some companies listing, particularly where they are high growth or private-equity backed.  He has therefore made a number of recommendations in relation to the free float position.  These include:

  • updating the definition of shares in public hands to:

    The current free float requirements do sometimes make it difficult for businesses which have been through a number of funding rounds or where the existing shareholders are keen to remain invested to list.  The additional flexibility around free floats is likely to make a significant difference to the number of these types of company which can come to market.

    • increase the threshold at which investment managers and other institutional investors are excluded from the free float from 5% to 10%, and to take account of situations where holdings are diversified across fund managers within the same platform who are making independent decisions;
    • include non “inside” shareholders eg those without a board seat or sovereign wealth shareholders who are acting purely in an investment capacity;

    • exclude shareholders who are subject to lock-up of any duration (as opposed to the current position where only shares subject to lock-up of more than 180 days are excluded);

    • reducing the minimum free float percentage to 15%; and

    • permitting companies to use alternative measures to the percentage to show there will be adequate liquidity in their shares.  For larger companies Lord Hill suggests this could be a minimum number of shareholders; number of publically held shares; market value of publically held shares and share price.  For smaller companies he proposes an agreement with an FCA authorised broker to use its best endeavours to find matching business if there is no registered market maker.

Conclusion

Overall the Hill Report is positive for smaller issuers, and for the market more generally. As long as investors are sufficiently informed to be able to make a sensible judgement as to whether or not to invest any steps which make the listing and fundraising processes quicker and more cost effective are to be welcomed. We hope Lord Hill’s recommendations will be implemented quickly, and encourage many more issuers to list in London.