FCA's revamped UK Listing Rules: Will they arrest the apparent decline of the UK stock market and rekindle London’s IPO glory days

There was no lounging on deck chairs or enjoying the short-lived heat wave at the UK Financial Conduct Authority ("FCA") this summer. Instead, the FCA was busy announcing a comprehensive package of reforms aimed at revitalizing the London stock market and making UK plc 'match fit' to compete more effectively in the increasingly globalized capital markets arena.

It began on 11 July 2024, when the FCA unveiled the long-anticipated final reforms to the UK Listing Rules, marking the most significant overhaul of the UK listing regime in over three decades. Effective from 29 July 2024, the old 'premium' and 'standard' listing segments were scrapped and replaced with a single listing category for commercial companies ("ESCC"). The ESCC places an increased emphasis on a disclosure-based approach, and is generally less onerous than the legacy premium listing segment, with fewer barriers to listing, reduced shareholder approval requirements, and more flexible dual class structure rules, giving founders and management greater control over their companies post-IPO. Most of the key proposals align with those consulted on back in 2023 (and summarized in our previous FF Briefing), although the FCA has made some key changes following feedback from key stakeholders, including simpler disclosure rules for significant transactions. The table in Appendix A compares the final rules applicable to the ESCC with the former requirements for legacy premium and standard listings.

Following this, on 26 July 2024, the FCA published a consultation paper outlining proposed reforms to the UK public offers and prospectus regime. These significant proposals aim to simplify capital raising in the UK by, among other things, reducing the need for a prospectus on the admission of additional shares (to enhance London's competitiveness with its US counterparts). The consultation period closes on 18 October 2024, and the FCA aims to finalize any rule changes by the end of the first half of 2025. The key proposed changes are set out in Section B below.

In this article, we outline the key changes to the UK listing regime, and proposed changes to the UK public offers and prospectus regime, and examine whether the concerns about losing the premium listing concept-and associated 'gold standard' corporate governance and investor protections-are outweighed by the benefits of the reforms, and assess whether these changes are adequate to fully unlock London's potential in light of any anticipated uptick in ECM activity. As we discuss in further detail below, the FF view is that while the recent rule changes are a step in the right direction and could boost M&A activity by removing the shareholder approval requirement on legacy premium listed corporates, they alone won't be sufficient to attract potential issuers, and investors, back to UK markets. Addressing more significant challenges-such as low company valuations, executive pay restrictions (when compared with the potential rewards available in the US), and necessary pension reforms-is crucial, as these factors have a far greater influence on a company's decision to list in the UK.

(A) Key points - UK Listing Regime (changes effective from 29 July 2024)

• Single listing segment - Commercial companies seeking to list equity shares in London will no longer be required to apply for a "premium" or "standard" listing, as these segments will be replaced with a single listing segment, the ESCC. This is the flagship listing category for commercial companies seeking a UK share listing. In addition, specific listing segments have been created for international issuers and SPACs (see below).
  
  
• Simplified eligibility criteria - The three-year financial and revenue-earning track record requirement and the "clean" or "unqualified" working capital statement have been removed as conditions for listing on the ESCC. This represents a clear shift from a prescriptive regime set by regulators to a disclosure-based system, and will accommodate the listing of start-ups or high growth companies that, for instance, have operated for fewer than three years or have a complicated recent financial history.
  
  
• Relaxation of rules on significant transactions - Despite strong opposition from the investor community, the FCA has significantly relaxed the rules governing significant transactions by legacy premium listed companies:
  
  • Class 1 transactions no longer require the publication of an FCA-approved circular and the prior approval of shareholders. Instead, only transaction announcements need to be published. The timing and content of these announcements are more flexible than before. Disclosure can be split into separate announcements: a Class 2-style announcement at signing, with more detailed non-financial disclosures deferred until no later than completion. Additionally, only two years of audited accounts (if available) are needed for disposals, with the disclosure of such information also capable of being deferred until completion. Furthermore, the final rules do not include requirements for historical financial information on the target or fairness statements for acquisitions, as initially proposed in the consultation paper. The FCA acknowledged that these requirements would not be practical in a deal-making environment.
  • A working capital statement is no longer necessary, even for significant transactions aimed at alleviating financial difficulty. In these cases, an announcement should be made as soon as the terms are agreed upon, detailing the nature, urgency, and severity of the financial difficulty. However, companies in severe financial distress are no longer subject to prescribed disclosure requirements, nor are they required to appoint a sponsor when undertaking a transaction in such circumstances.
  • Transactions in the "ordinary course of business" continue to be excluded, with new guidance being published on what constitutes the ordinary course of business.
• Class 2 transactions - The requirements for these transactions (where any transaction class tested is at 5% or more but less than 25%) have been removed, so key details will no longer need to be announced.
  
  • Abolition of profits test - The size of a transaction will continue to be assessed by class tests, but the profits test has been removed, due to its often-anomalous results in practice.
  • Reverse takeovers - Mandatory sponsor consultation, the publication of an FCA-approved circular, and the prior approval of shareholders will remain for reverse takeovers.
• Relaxation of rules on related party transactions ("RPTs") - Similar to the changes for significant transactions, the requirement for a compulsory shareholder vote and an FCA-approved circular has been removed. For larger RPTs, only a "fair and reasonable" opinion from the issuer's board, supported by a sponsor, will be required, along with a transaction announcement. All requirements for smaller RPTs (where any class test is 0.25% or more but less than 5%) have been eliminated. This means that key details of these transactions will no longer need to be announced, and the board is no longer required to provide a "fair and reasonable" opinion. Additionally, the ownership threshold at which a shareholder is considered a related party has been raised from 10% to 20%.
  
  
• More flexibility for dual class share structures - Weighted voting rights can now be exercised on most shareholder votes (except for the cancellation of listing or dilutive transactions). Such shares can be held by directors, employees, and pre-IPO investors, but with a maximum ten-year sunset period for institutional investors (such as PE funds). The FCA has discretion to modify the rules in exceptional circumstances, e.g., to accommodate the operation of golden shares by sovereign controlled entities.
  
  
• Controlling shareholders - While issuers will still need to maintain their independence from controlling shareholders, there will no longer be a requirement for a mandatory relationship agreement with them. Instead, a new mechanism has been introduced whereby directors can give an opinion on any resolutions put forward by a controlling shareholder where the director believes the resolution may circumvent the application of the listing rules.
  
  
• Slimmed down sponsor regime - The sponsor's involvement will now be primarily limited to the pre-listing phase, with reduced engagement post-listing. A sponsor will now only be required in the following situations:
  
  • for an IPO or initial listing;
  • for listing applications involving further share issuances on the ESCC that necessitate a prospectus;
  • when transferring from one segment (such as the transition category) to another;
  • when providing a "fair and reasonable" opinion on a related party transaction where any class test is 5% or more; or
  • if entering into a reverse takeover.
• FTSE inclusion - FTSE Russel (who administers the FTSE UK Index Series) has confirmed that the ESCC and Closed Ended Investment Fund categories will become the eligible index universe for the FTSE UK Index Series, replacing the premium segment.

• Specific listing segments have been introduced for:
  
  • international (non-UK incorporated) companies with multiple listings where the primary listing is on a non-UK market. This segment mirrors the standard listing rules, with specific obligations tailored for secondary listings;
  • shell companies and SPACs, which again is based on the old standard listing rules. A company seeking admission is required to have a constitution which provides that the initial transaction should be completed within 24 months from the date of admission (which can be extended by 12 months up to three times with shareholder approval); and
  • if none of the specific listing segments are applicable, legacy standard listed issuers have been placed into the transition category based on the old standard listing rules, which maintains the status quo until they are ready to transition to the ESCC. The transition category is closed to new applicants, and no end date for eligibility has been announced. Issuers wishing to "step up" to the ESCC can use a simplified transfer process.

(B) Key points - Proposed changes to the UK public offers and prospectus regime

• The proposed reforms to the UK public offers and prospectus regime underscore the ongoing importance of the prospectus, especially for entities seeking to IPO. The FCA intends to largely preserve the existing content requirements under the UK Prospectus Regulation, recognizing them as essential for investor protection and market effectiveness.
  
  
• However, for listed companies issuing additional shares, significant changes are expected, which shall potentially reduce the frequency with which prospectuses are required. The FCA is likely to increase the current annual exemption for further admission of shares from 20% of its current issued share capital to 75%, below which a prospectus would not be required. This shift acknowledges that when securities of the same type are already admitted to a regulated market, concerns about information equality are less pronounced compared to an IPO, due to the issuer's ongoing disclosure obligations under MAR and the DTRs.

• The proposal to increase the current annual exemption for further admissions would, if adopted, give listed companies greater flexibility to issue shares in connection with acquisitions, either as consideration or to raise cash, without the need for a prospectus. However, these changes should not be viewed in isolation and must be considered within the broader regulatory context. For instance, to maximize the reform's impact and ensure that issuers fully benefit from the increased flexibility, the Pre-Emption Group may need to revise its principles to raise the annual disapplication threshold for pre-emption rights to above the current 20% of share capital. Without this change, issuers may still need shareholder approval to issue consideration shares if they lack the existing authority, which will result in inevitable timing delays.

• The consultation period closes on 18 October, and the FCA aims to finalize its rules by the end of the first half of 2025, with an additional period before they come into force. Consequently, the new UK public offers and prospectus regime is unlikely to take effect before autumn 2025 at the earliest.

FRIED FRANK VIEW

The overhaul of the UK Listing Rules, combined with the proposed reforms to the UK public offers and prospectus regime, represents a bold move by the FCA to reshape the regulatory landscape for UK listings. By collapsing the previous premium and standard segments into the ESCC, simplifying the eligibility criteria, and introducing specific listing segments for, inter alia, SPACs, international issuers, and sovereign wealth funds, the FCA has created a more flexible listing regime, that is intended to accommodate a broader range of IPO applicants and reduce the regulatory and governance burden for both new and existing listed companies. Such proposals are designed to make the UK an attractive place to list, and to retain a listing.

Eliminating the requirement for a shareholder vote and an FCA-approved circular on significant transactions (except reverse takeovers) should offer UK-listed companies a much-needed boost in their ability to compete more effectively with their global counterparts and private equity players in competitive M&A processes. Previously, the need for shareholder approval introduced execution risks and timing implications, and, as a result, listed corporates often had to offer a premium over other buyers to be considered, or agree to pay break fees in the event that any required shareholder approval was not obtained. Removing these risks, along with streamlining the documentation process, should enable UK-listed companies to be more agile in executing their M&A strategies. Additionally, increasing the annual exemption for further admission of shares from 20% to 75% would, if adopted, provide greater flexibility to issue shares on acquisitions-either as consideration or to raise cash-without needing a prospectus, thereby eliminating another potential impediment to the deal-making process, or potentially reducing the cost of raising funds where such cash raising exercises are underwritten. These changes, coupled with adjustments to related party transaction rules, align the UK listing regime with many of its US competitors, where prior shareholder approval for significant acquisitions is generally not required.

However, this newfound flexibility comes with the challenge of maintaining robust corporate governance standards. While the reforms aim to position the UK as a more competitive listing venue, they also risk diluting the protections that have historically underpinned investor confidence in the market. The investor community has not been quiet in its opposition to certain of these reforms, in particular the removal of certain shareholder votes and liberalization of the dual class structure. Critics argue that these changes could reduce board accountability, increase investor risks, and lead to a deterioration in corporate governance standards. The counter-argument is that investors have long put their capital into exchanges with far lower levels of regulation than even the new relaxed UK Listing Rules. That may be true, but it is clear that the changes will undoubtedly alter how UK listed companies interact with shareholders, and may lead to investors needing to be more proactive by engaging closely with boards and conducting thorough due diligence before investing. Shareholders may also use other levers available to them under the UK Companies Act to hold boards accountable, such as voting against reappointments at AGMs, and advocating for greater board representation.

The success of these reforms will depend not only on their immediate impact, but also on their ability to adapt to evolving market needs, and will hinge on policymakers making further advances in other areas of the economy, particularly in pension reform. The FCA has laid the groundwork for a more competitive UK market, but the true test will be whether any of these changes can move the needle on what is the most important factor for potential IPO applicants - where do they believe they can raise the most money over time, and which stock exchange will properly appreciate the value of their business. This aspect isn't necessarily addressed by the new rules, nor do they tackle the limitations imposed by the UK Corporate Governance Code that critics argue restrict executive pay compared to international competitors, particularly in the US. Attracting and retaining top executive talent is key for growing the UK's capital markets. While there is a tendency in the UK to be uncomfortable discussing executive compensation, unless attitudes and approaches to executive pay are revised, it will remain a key factor in discussions about the UK's competitiveness as a listing venue.

As mentioned in our previous briefing, London's cultural, legal, and time zone advantages remain strong. However, addressing broader issues-such as confidence in the UK economy (and related valuation issues), pension investment trends, addressing the current limitations on executive compensation packages, (as noted above), and reversing the existing perception of the US as being the preferred listing venue for certain sectors like tech and life sciences-will be critical. These deep-seated issues will ultimately have a much greater say on an issuer's listing decision, regardless of the regulatory environment. Nevertheless, the renewed efforts by policymakers to revitalize the attraction of a London listing should be applauded, and we look forward to the final prospectus reforms being published in 2025 and observing the impact of these changes on the IPO market in 2025 and beyond.

Appendix

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