Lord Hill has published his committee’s recommendations to enhance the UK’s position as an international destination for equity listings. The aim is to make the UK’s listing regime more attractive and flexible, particularly for high growth companies such as future technology giants. The innovations as regards founder shares and SPACS in particular seek to catch up with the US and other markets. The Chancellor has said he wishes to move forward quickly to consult on the recommendations.
The proposals are in summary as follows:
- Dual class share structures should be permitted in the Premium listing segment, but subject to a five year period, a 20:1 voting ratio and the B class holder must be a director. The founder rights will be limited to votes on the shareholder remaining a board director and on a proposed change of control of the company. This will, as in the US and elsewhere, allow founder-led companies time to evolve free from takeovers and excessive short-term market pressures.
- The Standard listing segment will be re-branded, possibly as the Main Segment, and re-marketed as a more flexible venue, to be shaped by proposals that will be sought on a sector and industry basis from investor groups.
- The absolute free float eligibility requirement will be reduced to 15% but with flexibility instead to use different measures of liquidity if more appropriate. Smaller companies could instead offer to engage a corporate broker to facilitate trading by shareholders. The threshold for excluding significant shareholders from the free float calculation should be raised from 5% to 10%, together with certain other adjustments.
- Special purpose acquisition companies (SPACs) should generally no longer be required to suspend their shares on announcing an acquisition, so that shareholders are not locked in for an unduly long period. Investors in SPACs should be given a vote on the acquisition proposals or be able to redeem their investment. This will align UK practice closer to that of US equity markets.
- There should be a fundamental review of the prospectus regime to make it a better fit for the UK capital markets. As a minimum, consideration should be given to dispensing with full prospectuses where not justified by the situation. Less disclosure may also be required in the case of secondary offerings, and the rules should better distinguish between offerings and the admission of shares to a trading exchange. These reforms are intended in particular to assist capital raisings by smaller issuers and to encourage greater participation in offers by retail investors.
- Consideration will be given to whether overseas prospectuses can be recognised and accepted as equivalent for the purpose of dual and other listings in the UK.
- Meaningful forward-looking information should be eligible for inclusion in prospectuses. This would allow all investors directly to have the benefit of seeing the company’s financial projections. Such forecasts are currently usually only available to institutional investors in the form of connected broker’s research. To facilitate this, it is proposed that the level of liability of directors for such projections should be adjusted and made subject to the defences of honest belief and having exercised due care and skill.
- The revenue-earning track record requirements in the prospectus rules should be relaxed for a wider range of high growth companies. This would assist listings by early stage companies without such a track record, if they can demonstrate eligibility for listing by reference to other appropriate milestones.
- Historical financial information covering 75% or more of a company’s business over three years is currently required for applicants to Premium listing. It is recommended that the required period is reduced to the most recent 12 months, as the longer period can be a bar for early stage companies.
- Technological innovations should be used to encourage greater retail investor involvement in capital raisings and other corporate actions, and to make capital raisings easier and faster, including to accelerate the timetable for rights issues and other pre-emptive offers. Recent such innovations in Australia are being considered as a possible way forward.
- It is recommended that the FCA’s conduct of business rules regarding the timing of analysts’ research in an IPO process should be re-examined, as these rules have in practice tended to extend the listing timetable.
- The Government should seek to legislate to enable easier investment in listed companies by pension funds, to implement proposals to create a more competitive tax regime, and allow greater access to analysts’ research on smaller listed companies, the latter to reverse issues perceived to have arisen since the implementation of MiFID-II.
- A new statutory objective should be added to the FCA’s mandate, to encourage greater competitiveness and growth in making the UK a more attractive listing destination. The Chancellor is encouraged to report annually on such progress by reference to stated KPI’s.
Conclusion
The Hill recommendations are radical and wide ranging, but also address specific concerns raised by entrepreneurs, investors and their advisers. The proposed divergence from the EU listing and prospectus regimes aims to implement features which already exist in the US markets and elsewhere. The proposals partially overlap with the Kalifa Report’s recommendations on encouraging Fintech investment published last week.
The prize will be to implement these significant relaxations in the regulatory environment without damaging the good reputation of the UK’s equity markets.
It is anticipated that the Treasury and the FCA will consult on the proposals with a view to implementing revised regulations toward the end of 2021.
