New premium listing category proposal

On 13 July 2017, the FCA published a consultation paper on its proposal to create a new premium listing category for sovereign controlled companies (CP17/21) (Consultation Paper).

The paper is in response to the initial feedback received by the FCA to the question about the creation of a distinct international listing segment in its discussion paper on the effectiveness of the UK primary markets landscape (DP17/2) (Discussion Paper). Areas of concern among respondents include the need to maintain standards for premium listed companies and avoid introducing lower standards of regulation on the grounds of nationality. As a consequence, the FCA is bringing forward a more targeted proposal in respect of those companies with a substantial level of ownership by a sovereign country which it considers will make the listing regime work better for such companies, while ensuring standards of the regime remain high.

Why the need for a new premium listing category?

The FCA considers that “the current listing regime does not, in some respects, easily accommodate issuers with sovereign controlling shareholders, because of the different nature of a sovereign owner as opposed to private sector individuals or entities”. The FCA further considers that “investors and the market are sufficiently able to assess the additional risk arising from sovereign ownership”, therefore, the introduction of a separate listing category for listed companies with a sovereign controlling shareholder will assist investors in differentiating such companies and thereby understand the rules which apply to them.

Overview of the new premium listing category

The proposed new category will be based on the existing premium listing category for commercial companies apart from two modifications namely with respect to the related party and controlling shareholder rules. Companies which are eligible for listing under the proposed new category will still be required to comply in full with DTR 4 (periodic financial reporting), DTR 5 (vote holder and issuer notification rules), DTR 6 (continuing obligations and access to information), DTR 7.2 (corporate governance statement), Listing Rules 9.8.6R(5) and 9.8.6R(6) (report on the issuer’s application of the principles and relevant provisions of the UK Corporate Governance Code) and the requirements relating to the disclosure of inside information under Article 17 of the Market Abuse Regulation (No. 596/2014/EU).

The FCA considers that, whilst the two modifications to the existing requirements relate to important areas of investor protections, the application of the wider disclosure and transparency regime will provide the appropriate level of disclosure for investors to make an assessment as to how the relationship with the sovereign state and its government will influence a sovereign controlled commercial company’s prospects.

Sovereign controlled commercial company

The proposal defines a sovereign controlled commercial company as an issuer in which a "State" exercises or controls 30% or more of the votes able to be cast on all or substantially all matters at general meetings of that company. The FCA is consulting on whether 30% should be the appropriate threshold.

A "State" means:

• the sovereign or other head of State in his or her public capacity
• the government of that State
• a department of that State, or
• an agency or a special purpose vehicle of that State.

The State must be recognised by the UK government as a state at the time the application is made. When assessing eligibility the FCA will look at the substantive control being exercised by the State on a case by case basis. However, the FCA has stated that a passive stake held by a sovereign wealth fund is unlikely to demonstrate the requirement for substantive control by the State although this will be examined on the facts at the time of application.

The FCA considered whether, and if so how, it should restrict eligibility based on (i) the jurisdiction where the company is incorporated; or (ii) the nationality of the sovereign controlling shareholder, however, it does not see a principled case for doing so and does not propose to do so. This means that the new category could be available to UK companies although the FCA did remark that it did not see the new category as being of evident value for UK companies.

Free float

The paper does not discuss any relaxation of the existing free float rules in respect of sovereign controlled commercial companies. However, with the ability for a sovereign controlled commercial company to obtain a premium listing by listing depositary receipts over its underlying equity shares (see below), it would be possible for a sovereign controlled commercial company to obtain a premium listing despite it having a free float of less than 25% in respect of its underlying equity shares (provided that it is able to satisfy the eligibility requirements in respect of the depositary receipts). This is because the free float requirement in respect of depositary receipts will be judged on having a sufficient number of depositary receipts in public hands rather than on having a sufficient free float in respect of the underlying equity shares.

Indexation

Inclusion in the FTSE UK index series is only available to premium listed companies. Whilst companies which are eligible for listing under the proposed new category would be a premium listed company for these purposes the other eligibility criteria of FTSE, most notably nationality and free float, mean that it is unlikely that such companies would be eligible for inclusion in the FTSE UK index series.

Related party transactions

The FCA considers that when making an investment in a sovereign controlled company, an investor is making a judgement about how the sovereign controlling shareholder will interact with that company and that they are well-positioned to assess the relevant sovereign and jurisdictional risks as part of this judgement. The FCA is also of the view that it is “justifiable and realistic” to apply a different approach to the related party transaction rules where there is a sovereign controlling shareholder. Therefore, the FCA is proposing that a sovereign controlling shareholder would not be considered to be a related party for the purposes of the Listing Rules. This means that none of the related party transaction rules will apply to transactions between the listed company and the sovereign controlling shareholder and/or its associates (as defined in the Listing Rules). The related party transaction rules would continue to apply in respect of all other related parties.

The existing disclosure and transparency requirements will continue to apply within the new listing category. In particular, the FCA notes that to the extent a transaction between the listed company and the sovereign controlling shareholder and/or its associates would be inside information, this information would still be required to be disclosed in the absence of specific related party requirements.

Controlling shareholder requirements

The FCA proposes that the controlling shareholder provisions in the Listing Rules will not apply to sovereign controlling shareholders. In circumstances where there is another controlling shareholder (as defined in the Listing Rules), the controlling shareholder provisions would apply to that shareholder.

If the sovereign controlling shareholder ceases to hold at least 30%, the company will cease to be eligible for the new listing category and the FCA will have to be notified in such circumstances and discuss a transfer of listing category. If there ceases to be a sovereign controlling shareholder, this would constitute a breach of the continuing obligation and the FCA will have the ability to suspend and cancel the listing in the unlikely event that no proposal to re-categorise the issuer is forthcoming. A vote of independent shareholders will not be required to transfer to the existing premium listing category for commercial companies as greater protections are afforded to shareholders under this category. A transfer to a standard listing or cancellation of listing will be subject to independent shareholder approval.

Depositary receipts

Although depositary receipts over equity securities are not eligible for a premium listing, the FCA is proposing that they would be eligible for the new premium listing category on the same basis as equity shares provided that the holders of the depositary receipts enjoy the rights attaching to the underlying equity shares and the underlying equity shares would be eligible for premium listing. To be eligible, the issuer of the underlying shares to which the depositary receipts attach would need to fully comply with the amended standards for the new listing category, as well as having the depositary receipts admitted to trading on a regulated market.

With respect to voting matters, for all shareholder votes required under the Listing Rules the vote must be a vote of the holders of the underlying equity shares other than in relation to a vote to transfer listing category or cancel the listing which would require the approval of the independent holders of the depositary receipts. However, the FCA will require that the voting rights attaching to the underlying equity shares must “pass through” to the depositary receipt holder so that they can exercise their voting entitlements as if they were holders of the underlying equity shares. As a result, depositary receipt holders will have the full voting power implied by their proportionate equity interest and the votes will be exercised to reflect the depositary receipt holders’ instructions. All other rights afforded as a result of a premium listing (eg rights relating to a rights issue or open offer or in relation to a share buyback) will also be required to “pass through” to the depositary receipt holder.

Next steps

Responses to the Consultation Paper are due by 13 October 2017 and the FCA expects to publish a policy statement towards the end of the year. At the same time, the FCA will continue to progress the feedback received to the Discussion Paper and will issue further consultation papers in respect of any other specific policy proposals arising from such review that it wishes to advance.