Companies that are controlled by a sovereign state will be given a new dedicated category of premium listing and will not have to comply with two elements of the Listing Rules that often cause difficulty:
- They will not have to put in place a relationship agreement with the state. (For other companies that have a controlling shareholder such an agreement must be in place and must require the parties to ensure, among other things, that all transactions between the company on the one hand and the controlling shareholder and its associates on the other must be on an arm’s length basis and on normal commercial terms.)
- With the exception of a share buyback from the sovereign state, they will not have to obtain shareholder approval or a sponsor’s fair and reasonable opinion for transactions between the company and the state and its associates.
But otherwise all the Listing Rules, including rules that require details of related party transactions to be announced when they are entered into, will apply to sovereign-controlled companies (SC Companies) in the same way as to other companies.
The changes are designed to encourage SC Companies to seek a premium listing, so that investors have an opportunity to invest in such companies; but at the same time to preserve as many as possible of the protections that are enjoyed by investors in premium segment companies, so that the high quality brand of the premium segment is not “diluted”.
The changes will take effect on 1 July 2018. From that date SC Companies will be able to seek an admission, or transfer, of securities to the new category of premium listing.
Definition of SC Company
An SC Company will be defined as a company that has a controlling shareholder (i.e. with control of 30% or more of the company’s voting rights) which is recognised as a sovereign state by the UK Government at the time of application for listing.
Balance between competitiveness and investor protection
In simple terms, the FCA believes that, if the new listing category were not to be introduced, it is very likely that some SC Companies would either (i) seek a standard listing, which would provide investors with far fewer protections; or (ii) list on another market altogether, such as NASDAQ or the HKSE, which would deprive some UK investors of the chance to invest in such companies.
Unsurprisingly, however, a number of market participants, particularly on the buy-side, have criticised the FCA for trying to accommodate the wishes of Saudi-based Aramco, which is understood to be considering whether to list in London or elsewhere, but which apparently sees the current premium segment rules on related party transactions and controlling shareholders to be a significant deterrent to listing on that segment.
Depositary Receipts (DRs)
An SC Company will be able to obtain a premium listing using DRs instead of shares. (At present, DRs can only be admitted to the Standard segment.) The holders of the DRs must be able to exercise the votes attached to the underlying equity shares and there must be a full pass-through of other rights afforded to those shares (such as rights relating to a rights issue or open offer, or in relation to participation in a share buyback).
Rules that will apply to SC Companies
The rules for the new category of premium listing for SC Companies will primarily be set out in a new Chapter 21 of the Listing Rules. In broad terms, Chapter 21:
- Says that a SC Company must comply with LR 9 (various continuing obligations, including obligations to ensure that new shares are offered on a pre-emptive basis to existing shareholders; to report against the UK Corporate Governance Code; and to announce certain events), LR 10 (major transactions), LR 12 (buybacks) and LR 13 (circulars to shareholders).
- Applies LR 11 (related party transactions) but with the relaxations described above.
- Sets out the similar rules that apply where a SC Company has DRs admitted to trading, rather than equity shares.
Key protections for investors in an SC Company
Investors in an SC Company will therefore have most of the protections afforded to investors in other premium segment companies. In particular:
- Information about the relationship between the SC Company and the sovereign state, and all other information needed by investors to make an informed decision whether to invest, will need to be disclosed in the SC Company’s IPO prospectus.
- Information about related party transactions between the SC Company and the sovereign state must be announced: see “Transactions” below.
- If there is a material change in the nature of the SC Company’s relationship with the sovereign state, or if any other event occurs that constitutes inside information, the SC Company must announce it as soon as possible.
Control of its own business
An SC Company must at all times:
- Carry on an independent business as its main activity.
- Exercise operational control over the business it carries on as its main activity
At least 25% of the SC Company’s shares or, if it has DRs admitted to trading instead of shares, at least 25% of the DRs, must be in public hands.
One share one vote
Each share or DR must carry one vote. An SC Company is unlikely to be eligible for admission to the premium segment if, for example, the shares held by the sovereign state carry enhanced voting or other rights.
Election of independent directors
The (re-)election of the SC Company’s independent directors must be subject to approval by a separate vote of independent shareholders as well as by shareholders as a whole. Where independent shareholders do not vote in favour of the election, there must be a 90-day cooling off period, after which the election can proceed without a separate vote of independent shareholders.
- Most major transactions outside the ordinary course of business must be announced when they are entered into; and shareholder approval must be obtained for the largest transactions (Class 1 transactions).
- Most transactions that are outside the ordinary course of business and made between the SC Company (which includes any of its subsidiary undertakings) and the sovereign state or any of its associates (which are likely to include organs of state and other companies that are also controlled by the state) must be announced when they are entered into. (The FCA had originally proposed that a sovereign controlling shareholder would not be considered a related party for the purposes of Chapter 11 of the Listing Rules, so that such transactions would not have had to be announced unless they constituted inside (i.e. price-sensitive) information.)
- If the SC Company proposes to buy back shares from the sovereign state or any of its associates, it must either make a tender offer to all shareholders or comply with the normal rules on related party transactions. Such rules include appointing a sponsor, which must advise the SC Company that the transaction is fair and reasonable as far as shareholders are concerned, and obtaining independent shareholder approval for the purchase.
Investors are expected to take into account these protections, especially the disclosures made by the SC Company in its prospectus and on an ongoing basis and any information in the public domain about the political and economic situation in the sovereign state and how the state interacts with the companies that it controls or influences. Overall, investors must decide whether the anticipated benefits of owning securities in the SC Company outweigh the risks of the company being run in a way that is designed primarily to benefit the sovereign state or its rulers rather than investors as a whole. Investors may well price in such risks, so that the securities trade at a discount compared to similar companies that are not controlled by a sovereign state.
Passive funds and indexation
Under current rules, some SC Companies will be eligible for inclusion in the FTSE 350 and FTSE 100 indices. As a result, many tracker funds will automatically invest in their securities. However, it is possible that index providers may change the rules in future.
Categories of premium listing
SC Companies will constitute a new category of Premium segment issuer. Instead of three categories of securities within the Premium segment, there will now be five:
- Equity shares of commercial companies.
- Equity shares of closed-ended investment funds.
- Equity shares of OEICs.
- Equity shares of SC Companies.
- Depositary receipts that relate to equity shares of SC Companies.
FCA Policy Statement PS 18/11, which includes a redline showing the changes to be made to the Listing Rules.