November 4, 2009
In January 2008, the Financial Services Authority (the "FSA") began a review of the UK listing regime. In what appears to be a diametric move from the increasing heavy handed approach of the FSA in other areas of financial regulation, under the new listing rules UK companies will now be allowed to take advantage of an easier route to achieving a listing on the main market of the London Stock Exchange.
In a bid to maintain its position as a "premium quality" venue for main market listings in Europe whilst at the same time maintaining competitive tension as one of, if not the leading European exchange, the FSA undertook a lengthy consultation period reviewing the pros and cons of its "gold standard" listing regime and of the choices available for both UK and non-UK issuers alike. On 25 September 2009, the FSA published the Listing Rules Sourcebook (Amendment No. 3) Instrument 2009, amending the Listing Rules to allow for a reclassification of the existing listing regime into two new tiers, Premium and Standard and incorporating additional obligations on overseas entities obtaining a Premium Listing. These changes will come into effect as of 6 April 2010, with interim provisions for UK companies wishing to obtain a Standard Listing that came into force on 6 October 2009.
Under the existing regime, UK entities are currently permitted to apply for a so-called "Primary" Listing but cannot apply for a "Secondary" Listing. Non-UK entities however may apply for either a Primary Listing or a Secondary Listing, with a Secondary Listing allowing issuers to access the main market of the London Stock Exchange by meeting EU standards rather than the UKLA’s ‘super-equivalent’ requirements. The new Standard Listing tier allows UK entities to take advantage of the less onerous requirements and standards hitherto only open to non-UK entities. The FSA believe that the amendment to the Listing Rules and the reclassification of the two new tiers will increase the choice for UK entities wishing to list their stock and will ensure that UK entities will operate on a level playing field with their overseas counterparts.
The changes however result in a number of areas in more stringent rules applicable to non-UK issuers. As for maintaining competitive tension — many take the view that in practice these reforms will amount to no more than a just a change in jargon (involving a shift from the misleading "primary"/"secondary" terminology to the contemporary "premium"/"standard" classifications) and the hoped for flurry of listings on the LSE will not be realised.
A Premium Listing will be available for equity securities of UK and non-UK incorporated companies and investment entities. An issuer seeking to apply for a Premium Listing will have to meet the ‘super-equivalent’ standards and in addition and as an amendment to the current rules, where the issuer is a non-UK incorporated entity it will need to ‘comply or explain’ against the Combined Code, instead of simply meeting the corporate governance requirement of its country of incorporation. This will apply to financial periods beginning after 31 December 2009.
Non-UK entities that obtain a Premium Listing will furthermore be under an obligation to give pre-emption rights to their existing shareholders when they make an offer for cash unless the company has obtained shareholder approval to disapply any pre-emption rights in its constitution. The FSA has included a draft rule for consultation including a requirement that the company’s constitution provides for pre-emption rights with the aim of protecting what they see as being fundamental protection for existing shareholders. These changes in effect amount to a tightening up of requirements to which non-UK issuers are subject rather than a relaxation of the rules for such issuers.
Entities with a Premium Listing will be subject to the extensive continuing obligations currently required of entities with a Primary Listing, including the publication of an annual financial report and other specific information. They will also need to comply with the Disclosure and Transparency Rules.
As of 6 October 2009, Standard Listing became available to both UK and non-UK entities seeking to issue equities, global depository receipts ("GDRs") and debt and securitised derivatives. Companies with a Standard Listing will only need to comply with the lower standard required by EU legislation. The amendment to the Listing Rules, allowing UK companies to choose to apply for a Standard Listing rather than a Premium Listing was designed by the FSA in an effort to give UK companies greater choice (by supplying an alternative to listing on AIM) and in order to offer UK entities the same choice as their overseas counterparts.
All listed entities with shares or GDRs listed will be required to comply with requirements to make statements as to the corporate governance code to which they are subject to or have voluntarily complied with and explain any non-compliance with that code as well as describing their internal control and risk management arrangements in relation to the financial reporting process.
Entities with Standard Listing will be subject to reduced continuing obligations but will still need to comply with certain aspects of the Disclosure and Transparency Rules unless the entity is non-UK incorporated and complies with equivalent rules under the laws of another EU jurisdiction.
Moving between Premium and Standard Listings
With effect from 6 April 2010, entities will be permitted to switch between Premium and Standard Listing status. Cancellation of listing will not be required. An entity wishing to change its Premium Listing status to Standard Listing will first have to obtain shareholder approval and must also comply with certain procedural requirements including notifying the FSA of the intention to switch to Standard Listing status and setting out how the company meets the eligibility criteria for Standard Listing. An entity wishing to ‘upgrade’ to a Premium Listing must, among other procedural requirements, notify the FSA of its intention to switch and appoint a sponsor.
Premium or Standard? Market impact?
A Premium Listing will be a pre-requisite for an entity to gain admission on the FTSE UK index. As a result of this, the expectation is that most larger entities will continue to apply for Premium Listing despite the additional cost of compliance and the stringent continuing obligations imposed. If a premium listing can offer higher profile, increased analyst coverage and inclusion in the index, who will the "standard" listing then appeal to? The hope of the FSA is that UK entities which do not meet the eligibility requirements for premium listing may be attracted by the speedier route to listing and the reduced continuing obligation requirements of the standard listing. However, many institutional shareholders, governance setters and advisers have indicated that they will continue to gravitate and push for "premium" listings. It is this "gold standard" that has set the UK main market apart from many of its competitors and the irony is that now with choice of standard listing for UK issuers, there will be little to distinguish them from the UK’s junior market, AIM, as many of the eligibility and continuing obligations for AIM companies are more stringent that those which will apply to standard listing companies. With the capital markets still acutely depressed, the jury is still out on whether the new regime will lead to a surge in IPO activity.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn attorney with whom you work, or Selina Sagayam (+44 20 7071 4263, [email protected]) or Sarah Trapani (+44 20 7071 4279, [email protected]) in the firm’s London office.
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