Listing rule proposals—protecting the minority?

Will the Financial Conduct Authority’s (FCA) plans to strengthen minority shareholder rights succeed? Mark Austin, a partner in Freshfields Bruckhaus Deringer’s capital markets practice, reviews the FCA’s proposed new listing rules and advises lawyers how to prepare for the changes.

 
Original news
Consultation: Enhancing the effectiveness of the Listing Regime—Feedback and further consultation on related issues, LNB News 05/11/2013 135
Enhanced shareholder protection and improved transparency requirements for premium listed companies are under review as part of a FCA consultation on increasing the powers of shareholders. The consultation, which is the second of its kind, aims to improve shareholder governance in a proportionate and effective manner. Responses to the consultation must be received by 5 February 2014.

 
Why has the FCA put forward these proposals?
To strengthen minority shareholder rights where they are at risk of being abused—in particular where a controlling shareholder of a premium listed company does not maintain an appropriate and arm’s length relationship with the listed company.

 
What action has been taken to date?
In October 2012, the FCA proposed several changes to the UK listing regime in this area in its consultation paper CP12/25. The consultation closed in January 2013 and the FCA has undertaken extensive discussions with stakeholders about the proposals. CP13/15 was published earlier this month and consists of both feedback on the responses received to CP12/25, as well as a further consultation in certain areas.

 
Have changes been made to the original proposals?
The FCA has dropped several of its proposals and has instead proposed targeted measures to reinforce shareholder protections in situations where it believes they need to be strengthened, rather than rules to raise the general level of regulation.

 
The consultation closes on 5 February 2014. The FCA intends to publish its feedback in the first half of 2014 and, depending on the results of the consultation, to implement the final rules in ‘mid-2014’.

 
Does the consultation examine ‘relationship agreement’?
Relationship agreements for premium listed companies with controlling shareholders will become mandatory and must include ‘independence provisions’ to ensure the business remains independent of the controlling shareholder’s influence. The FCA has stepped back from its previous more onerous proposals. The existence of, and compliance with the independence provisions in, the relationship agreement will need to be disclosed in the company’s annual report.

 
Consultation proposal
The FCA proposes that if the relevant rules are not complied with (ie where there is no relationship agreement or a controlling shareholder breaches the independence provisions in the agreement or an independent director disagrees with the board’s assessment of whether the independence provisions have been complied with), minority shareholder approval will be required for all related party transactions, until the next annual report in which the board can make a clean compliance statement.

 
How does the FCA plan to treat independent directors?
Minority shareholders are to get a say in the election of independent directors. Independent directors of premium listed companies with a controlling shareholder are to be elected by separate votes of both all the shareholders as a whole and the minority shareholders. If the vote fails to achieve the necessary majorities, the company can hold a second vote 90 days later—requiring a simple majority of all shareholders, including the controlling shareholder. So, in effect, minority shareholders can object to, but not block, the election of controlling shareholders’ candidates.

 
The FCA has dropped the suggestion that it may move away from the ‘comply or explain’ regime. Companies with a controlling shareholder will not be obliged to have a majority of independent directors. Board composition remains, as currently, a ‘comply or explain’ matter under the Corporate Governance Code.

 
Will the new rules affect the ‘free float’ requirement?
The new rules will not seek to improve corporate governance through the free float requirement, which remains at 25%.

 
Consultation proposal
The FCA is consulting again on the criteria for determining whether the market will operate properly where less than 25% of the company’s shares are held by investors in the EEA.

 
What are the proposals around cancellation of listing?
The FCA proposes to give minority shareholders greater voting powers where a company with a controlling shareholder wishes to de-list. It sets out two options for cancellation:

 
• in addition to the existing 75% approval, cancellation would also require approval by a simple majority of minority shareholders, or
• retain the existing approach of requiring 75% shareholder approval in general meeting (amended to clarify the voting arrangements that should be followed when seeking shareholder approval).

 
What are the implications for LSE premium listed companies and their shareholders?
For premium listed companies with controlling shareholders, the implications are likely to be some additional regulation, greater shareholder scrutiny and a slightly increased compliance burden. For instance, those companies will have:

 
• six months from when the new rules come into force to enter into an appropriate relationship agreement with that shareholder, or amend an existing agreement so it complies, and
• a period until their next AGM for which notice has not yet been given to amend their articles of association to provide for a dual voting structure to elect independent directors.

 
Controlling shareholders will need to enter into or amend an existing relationship agreement with the company to allow it to act independently and think about what provisions they are comfortable with.

 
Minority shareholders will have greater influence over director appointments and potentially over how the company is run, as well as information rights—for example, in relation to the company’s compliance with the relationship agreement provisions.

 
How should lawyers and their clients prepare for the proposed changes?
Private practice lawyers will need to familiarise themselves with the proposals, understand how their clients may be affected and advise them appropriately.

 
In-house lawyers, at both premium listed companies and their controlling shareholders, will need to advise their boards how the changes will affect them.

 
Clients considering coming to market with a premium listing and a controlling shareholder will need to be comfortable they have an appropriate relationship agreement in place.

 
The standard form relationship agreement should be amended so it complies with the new rules to be introduced. A draft rider to be also inserted in standard form listed PLC articles to provide for the dual voting structure for the election of independent directors where the PLC has a controlling shareholder.

 
Mark Austin’s experience includes public and private securities offerings of all types, as well as mergers and acquisitions and general corporate work across a number of sectors. He regularly advises a range of corporate and investment bank clients. Mark is a regular speaker at external conferences, most recently at an FSA listing rules conference held in London in June 2013.

 
Interviewed by Kate Beaumont.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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