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Further enhancements to premium listing regime proposed as FCA confirms greater protection for minority shareholders

The listing rules for companies seeking entry to the premium market are to be tightened to give minority shareholders additional voting rights and greater influence over company decisions, the Financial Conduct Authority (FCA) has announced.

The regulator, which also acts as the UK Listing Authority (UKLA), is consulting further on the changes, taking into account feedback from an initial consultation exercise carried out by its predecessor the Financial Services Authority (FSA) last year. Additional proposals include refinements to the definition of 'controlling' shareholders, and requirements for the boards of listed companies to confirm compliance with the rules.

"Active engagement by all shareholders is essential to make markets work well," said David Lawton, the FCA's director of markets. "By safeguarding minority interests from abuse by controlling shareholders, these changes will promote market integrity and empower minority shareholders to hold the companies they invest in to account."

Corporate law expert Martin Webster of Pinsent Masons, the law firm behind Out-Law.com, said that the rules appeared to have "gotten the balance right" between the need to maintain the integrity of the UK markets while at the same time continuing to encourage overseas companies with controlling shareholders to list.

"Market integrity has to be the bottom line - if that is lost, London risks losing all – but these proposals seem to negotiate the tightrope well," he said. "I would think a Russian or Kazakh majority shareholder would be unlikely to decide against listing in London on the basis of these proposals."

Depending on feedback, the FCA intends to implement the new regime from 2014, it said.

The listing rules are a standalone set of rules covering the behavioural and governance obligations that companies must meet before they can list shares on the London stock market. Listings can be either premium or standard, each of which carries different governance requirements.

Standard listings need only meet EU harmonised standards while premium listing, which is only available to equity shares issued by trading companies and closed and open-ended investment entities, has its own 'super-equivalent' rules which are of a higher standard. Only premium-listed companies are eligible for inclusion on the FTSE UK Index series, including the FTSE 100.

Once in force, the new regime would introduce the concept of a 'controlling shareholder', made up of 30% of the shareholding of a premium-listed company, and would require an agreement to be put in place to regulate that person or group of people's relationship with the company and guarantee the company's independence. If a transaction between the company and a controlling shareholder appeared to threaten this independence, independent shareholders could vote to veto the decision.

In addition, where a controlling shareholder exists, the board of a premium-listed company would have to be made up of a majority of independent directors. A new 'dual voting' procedure will give independent shareholders more say in the appointment of these directors, however if the result of these votes does not achieve the necessary majorities the decision could be passed by a simple majority of all shareholders, including controlling ones, once 90 days have passed.

"The idea is that this ensures the company and independent shareholders talk to each other beforehand and agree on joint candidates," corporate law expert Martin Webster said. "The independent shareholders have only a qualified veto and the majority will eventually win the day, though it is difficult to imagine that many companies would be willing to go to the stage of this second vote."

"The provisions about allowing the minority independent shareholders to vote on transactions between the company and the majority shareholder if the relationship agreement is breached seem pretty messy, with inevitable disputes as to whether the agreement has been breached or not. Who decides whether it has been?" he said.

The FCA does not intend to increase the 'free float' requirement for premium listed companies at this stage, stating that doing so was "too blunt a tool to provide an effective remedy to the underlying concerns". Instead, it will set out the circumstances where it might consider modifying the existing 25% requirement for premium listings while indicating that it would be "unlikely" to reduce the requirement below 20%. A company's 'free float' is the percentage of its shares that are held by investors who are likely to be willing to trade them.

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