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Lord Hill’s keenly awaited report on the UK’s listing regime was released on 3 March 2021. Many of his recommendations focus on the premium listed segment, and much of the commentary to date has focussed on recommendations such as permitting dual-class share structures.
However, the report includes a number of proposals which if implemented may make the Official List more appealing to smaller companies, which we have highlighted below. Lord Hill has also been clear that while he considers his review of the listing rules to be important further consideration will need to be given to how the UK can strengthen its whole capital markets ecosystem. Substantial change is clearly coming.
The report recommends that the FCA’s objectives be changed to give it a duty to take into account the UK’s overall attractiveness as a place to do business. This is common for overseas regulators, but has not been something the FCA has had to formally consider before. The hope is that imposing this objective will result in regulation which is dynamic and flexible, evolving as circumstances change. Hopefully this will result in regulation which is more appropriately weighted to the status and risk profile of smaller companies, and make it easier and more cost effective for them to list.
Lord Hill’s view is that the standard listing segment currently has an identity and branding issue, as it was not established as a place to list companies of a particular size or type. To make the segment, which is the natural home of smaller companies on the Main Market, more appealing he has recommended that it be re-branded and promoted as a venue for all types of company to list in London with a real emphasis on flexibility. The idea is that while the FCA continues to ensure minimum standards investors will drive best practice, often through investor groups publishing industry guidelines. Individual issuers will have to justify non-compliance with this best practice in order to attract investment, and resulting in them holding themselves to high standards. This level of flexibility is likely to be very attractive to smaller issuers, who will be able to do what they consider in the best interests of themselves and their investors. In the long-term Lord Hill hopes that this attractiveness will result in clusters of similar companies listing on the segment, creating momentum and making it even more attractive for future listings. This could well include some tech business like those London has lost to overseas exchanges in the past few years as well as those in newly developing sectors.
Additional proposals to improve the attractiveness of the segment are:
Currently the listing rules require shares in public hands (the “free float”) of a company to be at least 25% of the company’s issued shares of the listed class. This is intended to ensure liquidity in the shares, but Lord Hill concluded that the current rules are a strong deterrent to some companies listing, particularly where they are high growth or private-equity backed. He has therefore made a number of recommendations in relation to the free float position. These include:
updating the definition of shares in public hands to:
increase the threshold at which investment managers and other institutional investors are excluded from the free float from 5% to 10%, and to take account of situations where holdings are diversified across fund managers within the same platform who are making independent decisions;
include non “inside” shareholders eg those without a board seat or sovereign wealth shareholders who are acting purely in an investment capacity;
exclude shareholders who are subject to lock-up of any duration (as opposed to the current position where only shares subject to lock-up of more than 180 days are excluded);
reducing the minimum free float percentage to 15%; and
permitting companies to use alternative measures to the percentage to show there will be adequate liquidity in their shares. For larger companies Lord Hill suggests this could be a minimum number of shareholders; number of publically held shares; market value of publically held shares and share price. For smaller companies he proposes an agreement with an FCA authorised broker to use its best endeavours to find matching business if there is no registered market maker.
The current free float requirements do sometimes make it difficult for businesses which have been through a number of funding rounds or where the existing shareholders are keen to remain invested to list. The additional flexibility around free floats is likely to make a significant difference to the number of these types of company which can come to market.
SPACs, or investment vehicles as they used to be known, are currently very trendy in the USA. They are cash shells with a management team who investors believe will make a successful acquisition. SPACs are often considered to have a timing advantage over a direct listing, as the investors and cash are already in place so a company wishing to go public does not have to undertake time-consuming road shows. The expertise of the management team may also result in a higher price being paid for a niche business than might be obtainable in a conventional IPO.
Lord Hill’s research showed that in 2020 248 SPACs were listed in the US raising the equivalent of £63.5bn. In contrast in the UK only four SPACs were listed and they raised only £0.03bn. In addition there is evidence that UK tech business are choosing to use SPACs to list in the US rather than choosing their home market.
The reasons for UK SPAC structures not having emerged at scale are various, but Lord Hill considers that a key factor is the requirement of the Listing Rules that trading in a SPAC be suspended when it announces a potential acquisition. This suspension will continue until the deal is concluded or falls away, and can last for years. While the shares are suspended investors are locked in to their investment, even if they wish to exit. The reason for the rule is that the FCA is concerned that smaller SPACs experience high levels of volatility around the time of proposed transactions.
The report suggests that the current rules around suspension be replaced with rules and guidance in relation to:
The granting of rights to investors in SPACs to redeem their shares may be difficult to achieve in practice, given Companies Act 2006 restrictions on the return of capital. In addition any rules requiring suspension for smaller SPACs who announce a transaction is likely to mean these proposed reforms will not benefit smaller issuers.
A root and branch review of the prospectus regime is recommended in the report, including considering changes to promote retail investors taking part in IPOs. For smaller issuers, Lord Hill notes that the prospectus process is considered cumbersome and that additional rules around marketing to retail investors means they are often excluded from investing.
A key recommendation to address this is that further issuances by companies which are already listed should be either exempt from requiring a prospectus or subject to much slimmed down requirements. While companies who are fundraising in several jurisdictions may need to produce fuller documents to comply with overseas requirements this proposal should make further fundraisings by smaller issuers much faster and more cost-effective, and therefore listing itself more appealing.
Under the current rules companies give a host of information about their previous performance in their prospectuses, but very little forward looking information – normally this is limited to half a page or so in the current trading and prospects section. However, investors are clamouring to be given more forward-looking information and issuers are keen to give it to them. The future plans of an issuer are a key consideration for investors, particularly where the issuer is fundraising to grow. To encourage the provision of this information, Lord Hill suggests that the FCA explore reducing the level of liability of directors in relation to forward looking statements, while maintaining safeguards, so that investors can receive more useful information. For example, he proposes that directors have a defence to liability in relation to forward looking statements if they can prove they had exercised due care, skill and diligence in putting it together and they honestly believed it to be true at the time it was published. This would apply to all issuers, including SPACs when making statements about acquisitions.
The ability to tell a more complete story about plans for the future is likely to be welcomed by SPACs and smaller companies looking for growth capital, and to make a London listing much more appealing to issuers.
Last year many issuers wished to raise money quickly in order to meet urgent funding needs arising from the COVID-19 pandemic, and listed companies had an advantage in raising equity quickly. However, some real inefficiencies in the market became apparent. In particular, issuers had to choose between doing a full pre-emptive offer (with all the connected delays of drafting a prospectus and the minimum two week offer period) or going down the placing route (limiting its offer to institutional and a limited number of retail investors, and either sticking within existing pre-emption waivers or using a cash-box).
The issues arising from these inefficiencies aren’t new, and following similar issues arising in the 2008 financial crises the Treasury established the RIRG to consider how to address them. The RIRG made various recommendations, some of which required action at EU level and others structural changes to the market. Some of its recommendations were implemented, but others were not – in particular the recommendation to look at introducing a more accelerated rights issue model.
Lord Hill recommends that the RIRG be re-established to look into which of the original RIIG’s outstanding recommendations should be implemented now, either as originally proposed or with tweaks, to make capital raisings more efficient and also to consider whether new technology means other measures could be implemented as well.
While merely implementing a further review will not assist smaller companies, the implementation of its conclusions may help make the listing more appealing to smaller companies by easing the path to further fundraisings as their businesses develop.
In 2018 the FCA introduced rules which require research analysts connected with an IPO to withhold publication of their research for seven days after the announcement of intention to float if unconnected analysts were not briefed alongside the connected ones. The intention is to allow unconnected analysts to compete with connected ones in the provision of information. Market practice in relation to these rules, however, has evolved to be that unconnected analysts are separately briefed, and therefore the seven day period applies. Market opinion revealed by Lord Hill’s call for evidence is that these rules haven’t resulted in any increase in research coverage by independent analysts but have hampered IPOs by introducing increased execution risk in the public phase and adding to the time and costs of the process.
Lord Hill has recommended that the FCA assess whether the rules are in fact resulting in more independent analysis being produced, and that if they aren’t meaningfully promoting independent analysis then they should be abolished or amended to address the market’s widespread concerns.
While this recommendation is another one for a further review and will not have any immediate impact in the longer term removing this rule and shortening the IPO process (and reducing its cost) is again likely to encourage smaller issuers to come to market.
Overall the Hill Report is positive for smaller issuers, and for the market more generally. As long as investors are sufficiently informed to be able to make a sensible judgement as to whether or not to invest any steps which make the listing and fundraising processes quicker and more cost effective are to be welcomed. We hope Lord Hill’s recommendations will be implemented quickly, and encourage many more issuers to list in London.
Kingsley Napley’s capital markets team focus on advising small and mid-cap companies listed on the standard segment of the Official List, AIM and the Aquis Exchange. We also regularly advise other market players such as Nomads, corporate advisers and brokers. We focus on ensuring that transactions are completed on time and on budget, and pride ourselves on providing accurate, clear and cost-effective advice.
This blog has been drafted and provided by Kingsley Napley LLP. It should be used for informational purposes only. The information is based on current legislation and should not be relied on as an exhaustive explanation of the law or issues involved without seeking legal advice.
John Young is a partner in the corporate and commercial team and specialises in the business needs of entrepreneurial, high growth and family businesses, advising them throughout their lifecycle - from start-up through to listing and beyond.
David Davies is a partner in the Corporate & Commercial team. His practice covers all aspects of corporate law, advising owner-managed and venture-backed businesses, investors and management on transactional matters. He also advises on restructuring, LLPs / partnerships and corporate governance matters.
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