New UK Premium and Standard Listing Regime.

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1 New UK Premium and Standard Listing Regime

March 2010

New UK Premium and Standard Listing Regime.

The new premium and standard segments of the UK listing regime take effect on 6 April and the FSA has now published the final rule amendments needed to implement the changes. This note provides an overview of the new regime and considers the implications for existing and potential issuers wishing to choose an appropriate market for their securities.

Overview

The focus of the changes is on segmentation and labelling. In particular, listing is divided into “standard” (previously “secondary”) listings, where listed companies comply with EU minimum standards and “premium” (previously “primary”) listings where super-equivalent requirements apply (e.g.

demonstrating a three year track record, appointing a sponsor on admission and complying with continuing obligations regarding substantial and related party transactions).

The new regime allows only voting equity shares to be listed on the premium segment. All other types of security must be listed under the standard segment, within which there are five categories: Shares, GDRs, Debt and debt-like securities, Securitised derivatives, and Miscellaneous securities. Open-ended investment companies and closed-ended investment funds can only list equity shares on the premium segment (they may also have standard listed shares, so long as they have a class of equity shares with a premium listing).

In implementing these new listing segments, the FSA has sought to adjust its rules so that they apply on a more consistent basis as between UK

incorporated companies and overseas companies in each of the “standard” and “premium” segments.

The most significant changes are:

> Companies with a standard listing of GDRs or shares1

> Shares which do not have full voting rights are regarded as ineligible for premium listing by the FSA. Any such shares which currently have a primary listing will be moved to the standard listing segment in June 2012.

will have to include a corporate governance statement in the director’s report specifying the governance code that applies to them as well as details of internal financial control and risk management arrangements.

> Overseas premium listed companies will have to comply or explain against the UK Combined Code.

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Other than preference shares which are specialist securities.

Contents

Overview ... 1 Impact of the changes... 2

Increased corporate governance disclosure... 2 Premium listing for overseas companies ... 2 Standard listing for UK incorporated companies 3 Moving from one

segment to another ... 3 Exclusion of shares without full voting rights from premium listing ... 3 Conclusions ... 4 Further information ... 4 Appendix 1 Distinctions between Premium Listing, Standard Listing and AIM in principle ... 5

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> Overseas premium listed companies must provide in their constitutions for shareholders to have pre-emption rights on secondary share issues. This rule will apply from 6 April 2011 to give existing issuers who do not already have such provisions time to amend their constitutions.

> To make the standard listing segment available to UK companies, for the first time.

A premium listing will remain a pre-requisite for inclusion in the FTSE UK series indices: other conditions for FTSE eligibility will also continue to apply as a premium listing of itself does not confer admission to the FTSE UK series indices. For investment funds and companies wanting to list their equity on the Official List, their sole option is premium listing. (Standard listing ceased to be available to these issuers following the implementation of the FSA’s Investment Entities Listing Review, in 2008.)

The impact of the principal rule changes is discussed below. A comparison of the main differences in the requirements for each of a premium and a

standard listing of shares, a standard listing of GDRs and an AIM listing is set out at Appendix 1 of this note.

Impact of the changes

Increased corporate governance disclosure

The new rules will require overseas issuers with a standard listing of GDRs or shares to comply with DTR 7.2 in respect of financial years beginning after 31 December 2009. This will require the making of a corporate governance statement in the directors’ report covering the governance code to which the issuer is subject in relation to the financial reporting process and certain details of share capital.

The corporate governance statement must include a description of the board and its committees, the main features of the internal control and risk

management systems. This requirement currently applies only to UK

companies so there will be increased ongoing compliance obligations for non-UK issuers2

Premium listing for overseas companies

The main changes in the rules applicable to overseas companies with premium listings are in relation to compliance with the UK Corporate Governance Code (previously known as the Combined Code) and to pre-emption rights.

The rules do not require compliance with the UK Corporate Governance Code, merely disclosure and an explanation of any non-compliance. This disclosure is intended to enable shareholders to make their own assessment of a company’s corporate governance practices. Investor representative groups such as the ABI, the NAPF and the PIRC seek to monitor compliance and publish reports on UK listed companies and issue voting

recommendations to their members. The FSA does not actively monitor the content of corporate governance statements, but to the extent it does so, it is concerned to check that they are made rather than to judge the adequacy of either any explanation given or the corporate governance practices disclosed. While many overseas companies with a premium listing already apply pre-emption rights voluntarily, this will be mandatory from 6 April 2011, allowing a transitional period during which issuers can make constitutional changes, if necessary.

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The pre-emption rule only applies to issues of shares (or sales of treasury shares) for cash. Offerings of convertible securities are not caught, although they are caught by the corresponding provisions of UK company law. However, the FSA states that it plans to consult separately on whether the pre-emption rule should be extended to apply to issues of convertible securities.

The pre-emption requirement can only be disapplied by a resolution of shareholders, unless the issuer’s home country has implemented Article 29 of the EU Second Company Law Directive – the provision on which the UK law pre-emption requirement is based – in which case pre-emption can also be disapplied as allowed by national law.

There is no set limit on the size of disapplications. UK companies typically obtain an annual disapplication over shares representing 5 per cent of their issued share capital in accordance with institutional investor guidelines, but this is not a Listing Rule requirement.

Standard listing for UK incorporated companies

UK incorporated companies can now apply for listing on the same, less onerous, basis, as was previously available only to non-UK companies. As a result UK companies, for the first time, have a choice of regimes for listing their shares: they can choose between a “premium” and a “standard” listing. The availability of standard listing may be of interest to UK companies which might otherwise have sought an AIM quotation – for example companies which meet the 25 per cent free float requirement but not the other

requirements for a premium listing. The standard listing option could also be of interest to issuers who do not derive sufficient benefit from their premium listing (in terms of increased profile, enhanced analysts’ coverage, inclusion in the UK series of the FTSE indices or a more liquid market in their shares) to justify the expense of maintaining it. New applicants for a standard listing will have to publish a prospectus, so the same level of preparatory work will be required for a standard as for a premium listing. By contrast, a prospectus may not be necessary for admission to AIM.

However, in other important respects the AIM Rules for Companies impose greater regulation on issuers including the requirement to have a nominated adviser or Nomad and certain continuing obligations such as the

requirements to notify or obtain shareholder consent to certain types of transactions. The standard listing option will therefore be less onerous in terms of continuing obligations than an AIM quotation.

Moving from one segment to another

Overseas companies which have a premium listing and do not need to retain that type of listing (for example to remain FTSE-100 eligible) may wish to switch to the standard listing category, to avoid the need to explain non-compliance with UK corporate governance provisions and offer shareholders pre-emption rights, which would otherwise apply with effect from 6 April 2010. Until 6 April 2010, it is possible to re-categorise a listing from premium to standard without obtaining shareholder approval. However, shareholder approval will be required to re-categorise a listing after 6 April 2010. Exclusion of shares without full voting rights from premium listing The requirement that equity shares must have “full voting rights” in order to have a premium equity listing means that any non-voting or limited voting ordinary shares will be relegated to the standard listing segment in June 2012.

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Author: Anne Kirkwood

This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors.

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The transitional period of just over two years before this change takes effect is intended by the FSA to give market participants time to adjust to the new listing structure, which may lead companies that will be affected by this change to reexamine their share structures. The index weightings of

companies that have such shares could be affected in the sense that premium listing is a prerequisite for inclusion of the shares in the relevant index.

Conclusions

The new listing segmentation achieves a greater level of parity between the obligations of UK and overseas companies, although investors will still have to take into account the different legal, economic and cultural implications of investing in companies from different jurisdictions.

The stricter standards for non-UK companies with a premium listing may cause some companies to move to a standard listing or, if they have listings elsewhere, to reconsider the need for a separate listing in London at all. Standard listing may prove an attractive alternative to AIM, not only for non-UK companies, but also for non-UK companies.

Further information

The FSA’s latest policy statement PS10/2 Listing Regime Review: Feedback on CP09/24 and CP09/28 with final rules is available at:

http://www.fsa.gov.uk/pubs/policy/ps10_02.pdf.

The FSA’s consultation paper CP09/24 Listing Regime Review: Policy statement for CP08/21 and further minor consultation is available at:

http://www.fsa.gov.uk/pubs/cp/cp09_24.pdf.

The FSA’s consultation paper CP09/28 Listing Regime review: Consultation on changes to the listing categories consequent to CP09/24 is available at:

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Appendix 1 Distinctions between Premium Listing, Standard Listing and AIM (in principle)

from 6 April 2010

Issue Premium Listing Standard Listing (equity) Standard Listing (GDRs

of overseas issuers)

AIM

FTSE UK indices eligibility

Yes, provided other conditions are satisfied

Not eligible for inclusion in UK series of FTSE indices

Not eligible for inclusion in UK series of FTSE indices Publicity - Branding - LSE trading information - RIS disclosures

Ability to use branding of “Premium” Listing LSE and regulatory information providers will be identifying Premium designation alongside trading information and announcements

Likely requirement that all references to company being “listed” clarify that it is only a Standard Listing - must not make any representation which is reasonably likely to be understood as suggesting that it has a Premium Listing

Likely requirement that all references to company being “listed” clarify that it is only a Standard Listing - must not make any representation which is reasonably likely to be understood as suggesting that it has a Premium Listing N/A Not admitted to Official List Investment mandates

Premium branding may attract investors, in similar way to FTSE indices

No suggestion at present that investment mandates will restrict investors to Premium listed securities, but may become a distinction in future

N/A Standard listing may

prove an attractive alternative to AIM, not only for non-UK companies, but also for UK companies

Admission criteria Application for listing

Requires three-year track record

Requires clean working capital statement Requires a minimum of 25% of shares in public hands

N/A

May provide negative working capital statement subject to explaining how working capital will be obtained Requires a minimum of 25% of shares in public hands N/A No working capital statement required Requires a minimum of 25% of GDRs in public hands (not the underlying securities) N/A N/A N/A Listing principles (LR7)

Broadly drafted Listing Principles apply, potentially allowing FSA to take enforcement action where the prescriptive rules do not apply

N/A N/A N/A

Requirement for Sponsor (LR8) or Adviser

Sponsor required on a premium listing for publication of prospectus or circular for significant, related party or buy-back transactions

N/A N/A Need an AIM

nominated adviser (NOMAD)

Public document Prospectus Prospectus Prospectus Prospectus only if

there is a non-exempt offer to the public in an EEA member state, otherwise Admission Document

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of overseas issuers)

AIM

Corporate transactions Significant

transactions

LR 10 Class tests and requirements for announcement/ shareholder approval

N/A N/A Under AIM Rules,

need shareholder approval Related party transactions LR 11 requirements for disclosure/shareholder approval/fairness opinion

N/A N/A No need for

shareholder approval but do need notification and fair and reasonable confirmation Corporate governance Requirement to disclose compliance with relevant corporate governance regime in annual report (LR 9.8.6(5) and (6))

A statement of how the listed company has applied the Main Principles set out in the UK Corporate Governance Code (formerly the Combined Code) in a manner that would enable

shareholders to evaluate how the principles have been applied. Obligation to comply or explain against that Code.

N/A N/A N/A – market practice

is to comply with the Quoted Companies Alliance guidelines Corporate governance disclosures (DTR 7.2)

Requires the making of a corporate governance statement in the directors’ report covering the governance code to which the issuer is subject in relation to the financial reporting process and certain details of share capital. Requires description of internal control and risk management systems and composition of committees.

Requires the making of a corporate governance statement in the directors’ report covering the governance code to which the issuer is subject in relation to the financial reporting process and certain details of share capital.

Requires description of internal control and risk management systems and composition of committees.

Requires the making of a corporate governance statement in the directors’ report covering the governance code to which the issuer is subject in relation to the financial reporting process and certain details of share capital.

Requires description of internal control and risk management systems and composition of

committees.

N/A

Share dealing restrictions)

Model Code (LR 9.2.7) N/A AIM rule 21 applies

Ongoing obligations to update the market Disclosure of

inside information to the market required?

Yes Yes Yes Yes

Disclosure of dealings by directors and PDMRs required (DTR 3)?

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of overseas issuers) AIM Disclosure and notification of interests in voting rights

Must comply with requirements of DTR 5

N/A

(See FSA release entitled “Information for issuers of Depositary Receipts” August 2008)

UK issuers on prescribed markets (e.g. AIM) are subject to DTR 5. Non-UK issuers on these markets are not subject to DTR 5.

Provision and dissemination of information

Need to comply with DTR 6

Need to comply with DTR 6 Need to comply with certain provisions in DTR 6

N/A

Ongoing financial reporting obligations Financial reporting

requirements

Must produce an Annual Financial Report, Half-Yearly Financial Reports and Interim Management Statements

Must produce an Annual Financial Report (DTR 4.1)

Further share issues and buybacks Pre-emption rights

(LR 9.3.11)

Pre-emption rights unless disapplied by

shareholder vote

N/A N/A N/A

Rights issues and open offers (LR 9.5)

Yes N/A N/A N/A

Share buy-backs (LR 12)

Yes N/A N/A N/A

Need for prospectus for further share issues

Required if issuing over 10% of the number of shares of the same class already admitted to trading over 12 month period

N/A Only needed for

non-exempt offers to the public

Warrants or options to subscribe

Number of issued shares pursuant to

warrants/options (excluding employee share schemes) must be limited to 20% of existing issued shares

N/A N/A Number of issued

shares pursuant to warrants/options must be limited to 20% of existing issued securities Cancellation of listing Cancellation of listing To cancel or move to standard listing - need 75% shareholder consent

N/A N/A To cancel listing

need 75% shareholder consent