UK Listing Review wants companies to stay at home

04 March 2021. Published by Connor Cahalane, Partner, Head of Public Companies and Karen Hendy, Partner, Head of Corporate

Recommendations will make it easier to list and fundraise on the London Stock Exchange

The UK Listing Review, led by Lord Hill, has published a report for HM Treasury setting out its recommendations to reform the UK's listing regime with the objective of closing the perceived gap between the London Stock Exchange and trading venues in the US and Asia.

The review highlights that the FTSE UK indices are largely comprised of 'old economy' businesses and too few innovative companies. The recommendations are aimed at making it easier for technology and other high growth businesses to IPO and grow on the London Stock Exchange. They would also bring changes for existing listed companies, in particular in relation to secondary offers.

We have set out below our ten key takeaways from the review.

  1. Wide-ranging review: Lord Hill's report looks at many aspects of the London listing regime and considers the need to simplify and speed up the process of listing in London, without reducing investor protections. It also recommends changes to make secondary offers more efficient and steps to improve retail investor involvement in corporate actions.

  2. Free float: The existing requirement for Main Market companies to have at least 25% of their shares in public hands is identified as one of the strongest deterrents to listing in London. The review recommends lowering the free float requirement to 15% and allowing the FCA to use other criteria to assess whether there will be sufficient liquidity.

  3. Standard segment overhaul: The review recommends rebranding and promoting the standard segment of the Main Market as a venue with flexible requirements suitable for all types of company. It suggests that investor groups should publish industry guidelines with specific criteria for index inclusion (e.g. FTSE 100), for example, key corporate governance protections, so that this is not only determined by whether a company is in the premium segment and standard list companies that meet these criteria would be eligible for index inclusion.

  4. Dual-class shares: One of the headline proposals is to allow companies with dual class share structures to list in the premium segment of the Main Market. The review recommends that dual class share structures should be subject to the following conditions:
    • a maximum duration of five years;
    • a maximum weighted voting ratio of 20:1;
    • holders of the B class shares must be individuals who are also directors of the company;
    • voting rights would be limited to blocking unwanted takeovers and ensuring they remained as a director;
    • limitations on the transfer of B class shares.

  5. Prospectus regime: The review proposes a fundamental overhaul of the UK's prospectus regime to reverse the trend of disclosure documents increasing in size but reducing in usefulness to investors. It suggests a distinction should be made between the level of disclosure required in listing particulars for admissions to listings, public offers and secondary offers, similar to the regime that was in place in the UK prior to the introduction of the EU's Prospectus Directive in 2005.

  6. Forward-looking information: Potential liability for companies and directors when providing forward looking information is identified as an area that should be addressed. For high growth companies, investors are particularly interested in their future plans and performance forecasts. The review recommends that legislation should be introduced to provide safeguards from liability for companies and directors where they can demonstrate that they have exercised due care, skill and diligence in preparing forward-looking information.

  7. Relaxed revenue earning track record for high growth companies: Under the current Listing Rules, scientific research-based companies are not subject to the eligibility requirement to demonstrate a revenue earning track record. The review recommends that this exemption should be extended to high growth innovative companies from other sectors, including technology and life sciences.

  8. SPACs: The Listing Rules require that trading in the shares of special purpose acquisition companies (SPACs) must be suspended when they announce an acquisition. The review recommends revising this rule to make London a more attractive listing venue for SPACs, in particular in light of the increased number of SPACs coming to the market recently and their ability to provide companies with an alternative route to listing than a traditional IPO.

  9. More efficient secondary offers: The review recognises that the UK capital markets performed well in enabling companies to raise £42.7 billion through LSE secondary issuances in 2020. However, onerous prospectus rules meant that only a small proportion of those offers were carried out as pre-emptive rights issues or enabled retail investors to participate. It recommends this is addressed by developing a new regime to enable retail investors to participate in secondary offers.

  10. Unconnected research rules: The review recommends that the FCA reconsider the rules introduced in 2018 to promote the availability of independent research. These rules, which in practice have led to companies briefing unconnected analysts separately from analysts connected to the underwriting syndicate, have not led to an increase in research coverage but have lengthened the public phase of IPOs, leading to increased execution risk.

The next step will be for HM Treasury to consider which, if any, of the recommendations it wants to take forward into legislation. The recommendations relating to changes to the Listing Rules would also require consultation. The FCA has separately announced that, where appropriate, it will aim to publish a consultation paper by summer 2021 and, subject to feedback, it will seek to make any changes to the Listing Rules by late 2021.

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