09/10/2024 | Press release | Distributed by Public on 09/10/2024 08:28
M&A/PE Briefing | September 10, 2024
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.
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.
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