Reforming the capital markets and regulatory framework to strengthen the UK’s position as a leading financial centre is a priority of the current government. In the last two years, there have been numerous reviews and consultations examining measures to attract companies to list in the UK, make it easier to raise capital and encourage wider investor participation. We set out below some of the key proposals relevant to companies with or considering a UK listing and their investors and advisers.

1. Eligibility for listing on the regulated market

The UK Listings Review, chaired by Lord Hill, was launched in November 2020 to examine how the UK can enhance its position as an international destination for IPOs and improve the capital-raising process for companies seeking a London listing.

Following his review, Lord Hill made a series of recommendations for reforms of the Listing Rules in March 2021. A number of these recommendations have already been implemented, with others expected to be implemented following ongoing consultation by the Financial Conduct Authority (FCA).

The changes that have already been implemented, with effect from the end of 2021, include:

  • Permitting dual class share structures for issuers in the current premium segment on a limited basis.
  • Reducing the free float requirement from 25% in ‘public hands’ to 10%.
  • Increasing the minimum market capitalization threshold for both the current premium and standard listing segments from £700,000 to £30 million.

Additional changes that are expected to be implemented include:

  • Replacing the current premium and standard listing segments with a single listing category for equity shares of commercial companies (ESCC).
  • Adopting a single set of Listing Principles and related provisions.
  • Removing eligibility rules that require an issuer to have a three-year financial and revenue earning track record as a condition for listing, and no longer requiring a ‘clean’ working capital statement.
  • Replacing the existing dual class share structure regime with a more permissive approach providing for:
    • Enhanced voting rights on all matters at all times (except for issuing new shares at a discount of >10%), not just removal of the holder as a director or after a change of control.
    • Enhanced voting rights to apply to shares held by a director, and only for so long as the person is a director.
    • A 10-year sunset period after which enhanced voting rights would cease to be exercisable (rather than the current five-year term).
    • No limit on the maximum voting ratio (currently set at 20:1).

The FCA expects the revised Listing Rules incorporating the additional changes described above to come into force by early 2024.

2. Public offer of securities in the UK and prospectus regime

One of the recommendations from the UK Listings Review was that the government carry out a fundamental review of the UK’s prospectus regime.

Following public consultations and publication of a draft illustrative statutory instrument, HM Treasury (HMT) published a near final version of the Public Offers and Admissions to Trading Regulations 2023 (POATRs) in July 2023.

Once passed into law, the POATRs will supplant the EU-derived Prospectus Regulation and accompanying instruments, which have applied since 2017 and were later incorporated into UK domestic law post-Brexit (the UK Prospectus Regulation).

Whilst the POATRs provide a relatively stable picture of the expected framework at a high level, much of the detail of the new regime has been delegated to the FCA in rules yet to be published (known for the purpose of the Regulations as the FCA’s ‘designated activity rules’). 

The main objectives of reform of the UK’s prospectus regime are simplifying regulation in this area, making it less costly and burdensome for companies to raise equity capital as well as to facilitate wider participation in the ownership of public companies, and improving the quality of information available to investors.

Currently, both an offer to the public’ and an ‘admission to trading’ require a prospectus, unless an exemption applies. In the future, an ‘offer to the public’ will be prohibited generally unless an exemption applies, and the FCA will set the rules for where a prospectus is required for an ‘admission to trading’.

The new regime will provide greater flexibility in terms of when a prospectus will be required and also in relation to the content of such prospectus.

Lord Hill’s UK Listings Review identified the negligence standard that currently applies to liability for prospectus content under the Financial Services and Markets Act 2000 as deterring issuers and their directors from including forward-looking information (i.e., projections, estimates, opinions about future events or circumstances, statements of intention etc.) in a prospectus.

The POATRs seek to remove this deterrent by introducing a fraud or recklessness liability standard for certain types of forward-looking statements, referred to as ‘protected forward-looking statements’. The FCA is engaging with market participants on the types of forward-looking statements that should qualify as protected forward-looking statements and on the identification of protected forward-looking statements within a prospectus.

Parliamentary time permitting, HMT intends to legislate for the new prospectus regime by the end of 2023. However, the legislation will not enter into force fully until after the FCA has made the related new designated activity rules. It is currently expected that the FCA will consult on draft rules in early 2024.

3. Continuing obligations of listed companies

Changes to the continuing obligations of listed companies have been driven by FCA’s Primary Markets Effectiveness Review, which is the FCA’s response to the UK Listings Review.

Broadly, the FCA’s proposals focus on removing the requirement for shareholder approval for large transactions and related party transactions (RPTs), as set out opposite.

The FCA expects these changes to be reflected in revised Listing Rules to come into force by early 2024.

Proposed changes to the significant and related party transaction regime

Listing Rule 10 – significant transactions

  • Removal of the requirements to publish a circular and obtain shareholder approval for Class 1 transactions.
  • Class 1 transactions will only require an announcement containing the prescribed information currently required for a Class 2 transaction, plus any information required by the UK Market Abuse Regulation.
  • Class tests will be amended to remove the profits test (given the frequency of anomalous results the test produces), and sponsors will have discretion to apply modifications to the class tests without consulting with FCA.
  • No sponsor ‘sign-off ’ or declaration will be required to be given to the FCA, with sponsor guidance needed only to the extent there is doubt about the correct application of the Listing Rules or the issuer’s obligations.<
  • No specific announcement obligations will be imposed for transactions under 25% on the class tests.
  • Reverse takeovers will continue to require shareholder approval.

Listing Rule 11 – RPTs

  • Removal of the requirements to publish a circular and obtain independent shareholder approval for any RPT that exceeds 5% on the class tests.
  • Instead, a listed company must:
    • Publish an announcement with a fair and reasonable statement from the board, having been so advised by a sponsor.
    • Disclose full particulars of the RPT.
    • Any conflicted director must not participate in the board.
  • Modified requirements for smaller RPTs above 0.25% and below 5% to be removed.
  • Removal of ‘enhanced oversight’ of RPTs with controlling shareholders (i.e., non-compliance resulting in loss of RPT exemptions).
  • Retain requirement to seek guidance from a sponsor where an issuer is proposing to enter into an RPT.
  • No change to RPT regime in DTR 7.3.

4. Secondary capital raisings

The UK Secondary Capital Raising Review, led by Mark Austin, was launched in October 2021 to investigate improving further capital raising processes for listed companies in the UK.

The findings of the review were published in July 2022 and included a number of recommendations to the government, the FCA and the Pre-Emption Group (PEG).

The recommendations of the UK Secondary Capital Raising Review that have to date been implemented, mainly by institutional investor bodies, include:

  • An increase in the size of a listed company’s recommended pre-emption disapplication authority to be obtained at its AGM (from 5+5% to 10+10% of existing issued share capital), together with encouragement of retail investor participation through ‘follow-on’ offers.
  • Greater flexibility for ‘capital hungry companies’ to raise significant capital on a non-pre-emptive basis, if disclosed at IPO.
  • An increase in the size of a listed company’s recommended share issuance authority for all types of pre-emptive offers from one-third to two-thirds of existing issued share capital.

Additional changes that require FCA rule changes and/or legislative changes include:

  • Removing the requirement to appoint a sponsor for large, ordinary course capital raisings.
  • Shortening the notice period for shareholder meetings (14 to 7 clear days) and for rights issues offer periods (from 10 business days to 7 business days).
  • Raising the dilution thresholds above which a follow-on prospectus is required and introducing a framework for offering booklets and cleansing notices.

5. Trading in listed securities

Accelerated settlement cycle

One of the measures proposed as part of the Edinburgh Reforms in December 2022 was the establishment of the Accelerated Settlement Taskforce.

The objective of the taskforce is to consider the potential benefits of the UK moving to a T+1 securities settlement cycle and outline how this change could be implemented.

The taskforce is expected to provide an interim public report on its initial findings by December 2023, and a full report with recommendations by December 2024.

Digitalisation

One of the recommendations from the UK Secondary Capital Raising Review led to the establishment in July 2022 of the Digitisation Taskforce.

The objective of the taskforce is to drive forward the full digitisation of the UK’s shareholding framework by eliminating the use of paper share certificates, and in general seeking to improve the UK’s intermediated system of share ownership.

In July 2023, the taskforce published an interim report which made a number of recommendations, including:

  • Legislation should be brought forward, and company articles of association changed, as soon as practicable to stop the issuance of new paper share certificates.
  • The government should bring forward legislation to require dematerialisation of all share certificates at a future date.
  • The government should consult with issuer and investor representatives on the preferred disposition of ‘residual’ paper share interests and whether a time limit should be imposed for the identification of untraced Ultimate Beneficial Owners (UBOs).
  • Intermediaries should have an obligation, as a condition of participation in the clearing and settlement system, to put in place common technology that enables them to respond to UBO requests from issuers within a very short time frame.

After considering feedback on its interim recommendations, the taskforce intends to explore in more detail the practical steps and timetable to implement its recommendations, with a final report to be delivered within six months.

Short selling

Reform of the UK Short Selling Regulation (UK SRR) was originally announced as part of the Edinburgh Reforms in December 2022.

The key proposed changes, announced in July 2023, include:

  • Replacing the public disclosure regime based on individual net short positions with an aggregate net short disclosure regime such that individual short sellers will no longer be identified.
  • Increasing the current threshold for reporting to the FCA of net short positions in shares traded on UK trading venues from 0.1% to 0.2%.
  • Removing restrictions and reporting requirements on UK sovereign debt and sovereign credit default swaps (although these would remain in scope of the FCA’s emergency intervention powers).

The government has indicated that it intends to publish a draft statutory instrument before the end of 2023. The draft statutory instrument will implement certain changes to the existing framework, while delegating responsibility for more detailed rules to the FCA.

It is expected that the final version of the statutory instrument will be laid before Parliament in early 2024.

6. Regulation of and access to investment research

The UK Investment Research Review (IRR) was established by the Chancellor in late 2022 to review the UK’s investment research regime and its contribution to the competitiveness of UK capital markets.

Key areas of focus for the IRR are increasing research coverage of smaller cap companies, reforming the existing regulatory regime as it relates to investment research, particularly MiFID II-derived rules on paying for investment research, and increasing access to investment research for retail investors.

The IRR published its findings in July 2023 and made seven key recommendations, including:

  • Establishing a research platform to serve as a central facility for the promotion, sourcing and dissemination of research, with a particular emphasis on research relating to smaller cap companies.
  • Changing the current rules on how investment research in paid for to allow greater optionality, including by allowing UK buy-side firms to pay for research from outside the UK on a ‘bundled’ basis where it is standard practice in that jurisdiction.
  • Allowing greater access to investment research for retail clients.
  • Involving academic institutions in supporting investment research initiatives.
  • Supporting issuer-sponsored research by implementing a code of conduct.
  • Clarifying aspects of the current complex and difficult to navigate regulatory regime relating to investment research and consider introducing a bespoke regime.
  • Reviewing the rules relating to investment research in the context of initial public offerings.

The government has accepted the IRR’s recommendations and the FCA is preparing to consult on proposed reforms to the investment research rules, with a view to implementing new rules during the first half of 2024.

Future of UK Capital Markets series

Future of UK Capital Markets series

Visit our Future of UK Capital Markets page to read our series of client updates on the UK government’s sweeping efforts to reform the capital markets and the wider regulatory system to strengthen the UK’s position as a leading global financial centre.

If you have any questions regarding the matters covered in this publication, please reach out to any of the lawyers listed below or your usual Davis Polk contact.

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