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11 December 2018
What is a sovereign-controlled commercial company?
Scope of new listing category
Key differences to commercial company premium listing category
Key requirements for new listing category
Inclusion in FTSE indices
Stakeholder reaction to new listing category
The listing regime for the United Kingdom's Official List is divided into premium and standard listing segments. The requirements for a standard listing stem from the relevant EU directives and regulations that apply to regulated markets across the European Union. For admittance to the premium listing segment, an issuer must meet higher UK-specific standards that are intended to provide additional investor protection and promote shareholder confidence.
In July 2018 the UK Financial Conduct Authority (FCA) introduced a new category for its premium listing segment, with the aim of making UK capital markets more accessible to companies which are directly or indirectly controlled by a nation state. Six months on, issuers have yet to avail themselves of the new regime.
The new category is exclusively for sovereign-controlled commercial companies. According to the FCA, investors that choose to invest in sovereign-controlled commercial companies are accustomed to assessing sovereign risk. As such, some of the investor protections associated with a premium listing are waived for sovereign-controlled commercial companies with securities listed on the new category of the premium listing segment.
In order to qualify for the new category, a company must have a 'sovereign-controlling shareholder', which is defined in the new rules as a shareholder:
The company must also be a commercial company and not an investment fund.
Equity shares and depositary receipts over equity shares can be listed on the new category. This means that for the first time a listing of depositary receipts can be admitted to the premium listing segment. For some non-UK companies, this means that they now have access to the premium listing segment, whereas previously this would not have been possible because their shares (or depositary interests in such shares) are not capable of being traded on the United Kingdom's electronic settlement system, CREST.
Depositary receipts may be an attractive option for sovereign-controlled commercial companies that do not wish to satisfy, or to seek a derogation from, the 25% free-float requirement for premium listed equity shares under the UK Listing Rules. The free-float requirement is that all securities of the same class must be admitted to listing and 25% of that class (whether shares or depositary receipts) must be in public hands. As such, a sovereign-controlled commercial company will not be prohibited from listing a small percentage of its total underlying equity capital in the form of depositary receipts, as long as those depositary receipts satisfy the free-float test by reference to the total number of depositary receipts.
The UK Listing Rules require that a commercial company with a premium listing of its equity shares enters into a relationship agreement with a controlling shareholder (ie, a person who exercises or controls on his or her own, or together with any person with whom he or she is acting in concert, 30% or more of the votes able to be cast on all or substantially all matters at a general meeting of the company). A relationship agreement must contain certain prescribed provisions designed to ensure the issuer's independence and compliance with the UK listing regime. Under the new rules, this requirement will not apply to a sovereign-controlling shareholder or a sovereign-controlled commercial company, but will apply to any other controlling shareholder of that issuer.
The premium listing regime also imposes certain controls on commercial companies entering into a transaction or arrangement with a related party (which includes any shareholder of the issuer who is entitled to exercise, or to control the exercise of, 10% or more of the votes able to be cast on all or substantially all matters at a general meeting of the issuer). These controls include, in certain circumstances, seeking shareholder approval for the transaction or arrangement. While sovereign-controlled commercial companies will not be required to seek shareholder approval for a transaction with a sovereign-controlling shareholder under the related party rules, they will be required to publicly announce transactions over a certain size, notwithstanding whether the transaction or any aspect of it is inside information. Further, the significant transaction regime will apply and therefore, where one of the ratios relating to the gross assets, profits, consideration or gross capital of the issuer and the subject of the transaction or arrangement with the sovereign-controlling shareholders is 25% or more, the sovereign-controlled company will need to seek shareholder approval.
Other than with respect to the controlling shareholder and related party regimes that have been amended for the new category, issuers with securities admitted to the new category are, broadly speaking, obliged to comply with all other eligibility and continuing obligations applicable to other commercial companies with shares admitted to the premium listing segment.
However, there have been some necessary amendments to incorporate depositary receipts into the premium listing requirements. To preserve the spirit of these requirements, while appreciating that the listed depositary receipts may not represent the entire underlying share class, where shareholder consent is required under the Listing Rules for other commercial companies with a premium listing (eg, a significant transaction, implementation of a share buy-back or employee incentive scheme, the appointment of an independent director, or the offer of shares at a discount of more than 10% to market price) the sovereign-controlled commercial company will be required to convene a general meeting of shareholders of the class of shares represented by the depositary receipts and ensure that the holders of the depositary receipts are able to exercise their voting rights at such a meeting.
Currently, only companies with equity shares listed on the premium listing segment are eligible to be included in the FTSE UK Index Series. Without changes to the FTSE UK Index Series eligibility criteria, while equity shares admitted to the new listing category could be included, any listing of depositary receipts would be excluded. Sovereign-controlled commercial companies issuing equity shares would still have to meet the other criteria set out in the FTSE Ground Rules, including a free-float requirement for issuers without UK nationality of greater than 50% which, given the nature of such issuers, may not be achievable.
Reaction to the new rules has been mixed and the only company eligible for the new category to list in London since July 2018 elected to list global depositary receipts on the standard listing segment of the Official List and not take up the option to make use of the new category. The Investment Association, which represents UK investment managers, welcomed some of the amendments made in the final set of rules from those that were initially proposed, but remains of the view that sovereign-controlled commercial companies should not be admitted to the FTSE UK Index Series. The Institute of Directors, which represents UK business leaders, has expressed disappointment with the new rules, particularly the lack of a requirement for binding independent votes on independent directors, which had been their recommendation.
For further information on this topic please contact Dan Hirschovits or Jamie Corner at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email (email@example.com or firstname.lastname@example.org). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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