UK Listing Review (March 3, 2021)

UK financial institutions are clearly suffering from Brexit. Passporting rights have gone, financial services are not dealt with to any significant degree by the UK/EU future relations deal, and the European Commission seems unlikely to make equivalence determinations in the UK’s favour in the near future—or at all. This creates a policy dilemma for the UK authorities: whether to maintain the close relationship between UK and EU rules in the financial sector, which the concept of retained EU law currently establishes, in the hope that the EU will grant equivalence in time, or to regard equivalence as a forlorn hope and to move away from the EU template in order to become more competitive. It should be said that the same policy dilemma exists for the EU: to bind the UK to the EU rules through equivalence decisions or to risk the creation of a more effective competitor on the edge of the EU.

This debate will clearly be carried on over a number of years and issues. However, one can regard the Review of the UK listing regime, produced by Lord Hill a few days ago, as a first instalment. It deals with only one element of financial regulation—stock exchange listing—and, within that, it focusses on IPOs, where the UK is regarded as having performed poorly in recent years. Its rhetoric is firmly in the ‘making the UK more competitive’ camp, but it rightly sees the sources of competition in the listing area as global. It is concerned not only with what an EU, from which the UK has excluded itself, might do, but more with competition from US and Far Eastern markets. Moreover, although it advocates the policy of a substantial move away from the EU rules governing prospectuses in the medium term, the immediate reforms it proposes could mostly have been implemented even if the UK had remained in the EU.

What seems to have happened is that the Brexit shock has motivated an overall assessment of the allegedly non-competitive aspects of the listing regime, rather than a specific exercise in the use by the UK of its new-found ‘sovereignty’. As the Review itself puts it (at p 9): ‘None of our recommendations go beyond what can already be found in competing financial centres in the USA, Asia or, indeed, Europe. To emphasize this point: this report is not about opening up a gap between us and other global centres by proposing radical new departures to try to seize a competitive advantage. It is about closing a gap which has opened up.’

In fact, the two reforms which are likely to prove most controversial with domestic interests are clearly permitted by EU law, whether retained or not. These are permitting companies with dual-class shares to list on the premium-segment of the Main Market and facilitating the operation of special purpose acquisition companies (SPACs). General UK corporate law contains no restrictions on the adoption of dual-listed share structures. The listing prohibition stems from the Principles applicable to premium-listing companies which require, in short, voting rights proportionate to the economic interests of the shareholders (LR 7.2.1A). The Principles do not reflect an EU requirement. Although the Commission had ambitions at one stage to introduce a ‘one share, one vote’ rule for the EU, they came to nothing. The Review proposes a limited change which would essentially protect founders promoting an IPO from being removed from their board or seeing their company taken over for a limited period post the IPO. In this way the implementation of the founders’ ‘idiosyncratic vision’ would be protected. The LR Principles preventing dual-class listings are in fact relatively new (middle of the last decade); before that it used to be said that the reason there were no companies with disproportionate voting rights on the Main Market was that the institutions would not buy into such companies. If this reform is implemented, it will be interesting to see whether this institutional policy continues in the area freed up for dual-class listings.

SPACs are cash-shells which raise money from investors, which will then be invested in a company chosen by the management of the SPAC, usually by way of a reverse takeover. This reverses the normal IPO procedure. Instead of the operating company seeking investors, investors seek an operating company. SPACs clearly have benefits and risks, and the Review is more impressed by the former than the latter. The regulatory impediment identified by the Review, again not stemming from EU law, is the LR presumption that the SPAC’s shares be suspended when an acquisition is identified, thus depriving the investors in the SPAC of liquidity (LR 5.6.8). The Review suggests less draconian ways of protecting investors in SPACs.

However, the Review also takes a more general aim at the current eligibility and prospectus rules. On prospectuses, in particular, the Review recommends (p 32) ‘a fundamental rethink of the current regime. The goal of reform should be an approach much closer to the one that existed in the UK before the Prospectus Directive and Prospectus Regulation.’ So, there is the possibility of a significant shift of the UK rules away from the EU template in this area. But it is difficult to know what will emerge from the re-think, which was not carried out by the Review itself but is recommended by the Review as a future task for the Treasury and the FCA. As to what is proposed short of the fundamental re-think, that is either clearly or arguably permitted by EU law.

On eligibility, the recommendations to lower the free-float requirement to 15% (from 25%) and to use alternative measures of liquidity appear to be permitted by Art 48 of the Admissions Directive. The three-year track record required by Art 44 is recommended to be retained, albeit with certain relaxations of the current rules, which are in any event ‘super added’ UK rules, not EU requirements. On the prospectus, the Review complains that they lack enough forward-looking information, which it rightly regards as ‘key’, and appears to put this down to liability risk. ‘[W]hen considering the future plans of a company and what trajectory the company is going to take, it is hard for companies to have the same level of certainty as they do over past events. It would be strange if investors expected them to. Yet the level of liability associated with both the past and the future is the same under the current legislative framework’ (p 39). If this analysis is correct, then the remedy lies in the hands of the UK, since all that the Prospectus Regulation requires is the application of national standards to misstatements in the prospectus. In any event, the Review’s analysis of the law is apparently defective. The standard of liability (negligence) under FSMA 2000 is certainly the same for both past and future statements, but negligence is a standard which takes account of the different levels of uncertainty to which the Review rightly points. So, same standard, but not the same outcome in relation to backward- and forward-looking statements. The Review may have misunderstood the misstatement liability to be a strict one. In annex D the Review summarises s.90 FSMA with no reference to Schedule 10, which introduces the negligence basis for compensation liability, albeit with burden of proof on the maker of the statement. Annex D also states that it is a criminal offence to breach s.90, but this seems to be a mistaken view, although intentional or reckless misstatements in a prospectus could amount to criminal offence under other provisions.

Finally, the Review engages, yet again, in an attempt to make the Standard segment of the Main Market an attractive venue of listers. This segment should be ‘rebranded and remarketed’ (p 22). As the Review right says, the Standard segment had become a place in which to dump the minimum EU requirements, whilst imposing more demanding standards of premium-listed companies. So ‘re-branding and re-marketing’ might involve a move away from EU standards. Thus, the re-configuration of the standard segment and the ‘fundamental’ review of the prospectus rules are the areas where, in the medium term, a shift away from the EU rules might be found. Of course, the EU cannot be expected to take this lying down. It might replicate the UK’s moves. It would be an interesting result of Brexit if the loss of competition in corporate law as a result of the UK being excluded from the EU’s freedom of establishment provisions were counter-balanced by competition in the listing area as a result of the UK’s freedom to ignore EU law.

Paul Davies QC (hon), FBA is Senior Research Fellow at the Centre for Commercial Law, Harris Manchester College, University of Oxford.