UK listing regime reform: update on potential impact on securities litigation

The Financial Conduct Authority (FCA) has published a further consultation paper for the UK's new listing regime (CP 23/31) which includes in draft (most of) the new UK Listing Rules, following stakeholder feedback to its initial consultation (CP 23/10) last May (see our previous blog post).

The FCA's overarching philosophy is to shift to a disclosure-based regime (rather than shareholder votes or strict eligibility criteria) to encourage more companies to list in the UK. The changes proposed will result in a rebalancing of risk, with greater risk shifting to investors, which may impact future claims brought by shareholders under ss.90 and 90A of the Financial Services and Markets Act 2000 (FSMA).

For a more detailed analysis of the draft Listing Rules, please see this blog post by our Capital Markets team.

In summary, the FCA is implementing a new single listing category to replace the current premium and standard segments and proceeding with most of the proposals trialled in May last year, in particular: (1) removing the requirement for shareholder votes and circulars for Class 1 and related-party transactions; (2) requiring annual reporting on compliance with the governance code; and (3) modifying the sponsor regime. We consider the potential impact on securities litigation of each of these changes below.

Class 1 transaction notifications

The FCA has maintained that it will significantly reduce the disclosure obligations on companies when proceeding with a "Class 1" transaction (broadly those worth 25% or more of the listed company) and the requirement for shareholder approval.

Looked at through a litigation lens, these changes are likely to have two principal implications. Firstly, companies will not need to prepare a Class 1 circular for significant transactions, and will instead need to prepare an RIS announcement to enable investors to have a clear understanding of why the transaction is being undertaken. Such announcements could form the basis of future s.90A FSMA claims, as discussed further below.

Secondly, in terms of the content of market announcements, while some of the Class 1 circular regime requirements have been replicated, the FCA has dispensed with many of the mandatory financial disclosures required previously for Class 1 circulars. Accordingly, the amount of information disclosed to the market in the context of a Class 1 transaction will, overall, be reduced, although in CP 23/31 the FCA has slightly "enhanced" the Class 1 transaction disclosure requirements since CP 23/10, to better inform shareholders' ongoing investment decisions. These are in addition to MAR and overarching obligations on issuers to provide all necessary information to enable shareholders to assess the terms and impact of the transaction.

In summary, the Class 1 notification must contain:

1. The basic information for a Class 2 transaction notification, including details of any break fee arrangements, the benefits and risks of the transaction on the listed company and a statement by the board that the transaction is, in the board’s opinion, in the best interests of security holders as a whole;
2. Limited financial information on the target (including historical financial information for at least 2 years, rather than 3) or, where this is not available, an explanation of how the price has been determined and a statement from the board that it considers the price is fair; and
3. A statement on the effect of the transaction on the group’s earnings and assets and liabilities (ie a light-touch pro-forma).

Returning to what this might mean from a litigation perspective, every market announcement creates a potential trigger for liability under s.90A FSMA. The statements which form the basis of FSMA claims against companies are often the result of a trawl through publications to identify isolated statements which are, in hindsight, asserted to be false or misleading. The new Class 1 transaction regime will lead to more market announcements and therefore more potential hooks for shareholders to raise s.90A claims. While the number of market announcements will increase, the scope of information disclosed in respect of Class 1 transactions will reduce. There is a risk that because less information is required to be disclosed, the importance of the information which is disclosed (and the risk of not disclosing material information) increases.

Importantly, the FCA's changes also mean that no third-party advisers are required to be involved in preparing the announcement. Companies should continue to scrutinise carefully the disclosures made (or omitted) from announcements and keep a contemporaneous record of their decision-making process. It may be prudent for companies to attempt to mitigate any potential liability under a future s.90A FSMA claim by continuing to engage professional advisers to justify any statements made in, or excluded from, announcements. This is because in any subsequent litigation, if directors have received advice from professional and experienced advisers it can serve as an indicator to the court that the board has not acted recklessly (or dishonestly).

The disputes risks outlined above are discussed in more detail in our previous blog post on CP23/10. Similar risks will arise for related-party transactions (broadly those worth 5% or more of the listed company), for which the FCA is also proposing to remove the need for shareholder approval.

Governance Code and annual reporting

The FCA has maintained its "comply or explain" requirements in relation to environmental, social and corporate governance (ESG) related annual disclosure. It has clarified that these requirements will extend to all commercial companies, which will be required to include in their annual financial report a statement of how they have complied with the applicable Principles set out in the UK Corporate Governance Code. If they have not complied, they must explain why.

These new disclosure obligations, coupled with greater focus generally on  ESG-related matters by  investors, heighten the risk of shareholder claims. The more public statements made by companies in relation to ESG matters, the greater the risk of a perceived discrepancy between words and actions and the greater likelihood that shareholders may resort to a s.90A claim to challenge disclosures related to matters like climate change transition plans. Again, it is important that companies minimise potential liability where possible by ensuring their ESG disclosures are accurate, justifiable and supported by good records.

Role of sponsors

The FCA has confirmed it will still require a prospectus to be produced for an issuer seeking admission of its equity shares to a regulated market. The FCA indicates that the sponsor's role at the listing gateway should remain "largely unchanged" save for no longer having to assess whether an applicant meets the historical financial information, 3-year financial track record or clean working capital statement eligibility requirements that currently apply, which the FCA recognises passes on "greater risk" to investors.

The FCA will not require a prospectus for a listed company where it issues further equity on regulated markets. It has clarified that the role of sponsors would instead be focused on significant increases in share capital requiring a prospectus (subject to the ongoing consultation on the prospectus trigger threshold), related party fair and reasonable opinions, reverse takeovers and certain transfers between listing categories. The FCA is currently seeking views on whether its proposed approach is proportionate.

A reduction in the number of prospectuses published will likely reduce the risk of s.90 FSMA claims (which relate to allegedly untrue or misleading statements in / omissions from prospectuses). It will likely lead to an increase in investor scrutiny of other company disclosures/announcements related to equity, which may increase the risk of s.90A FSMA claims.

Next Steps

The FCA's consultation period closes on 22 March 2024 (save for sponsor competence proposals, the consultation period for which ends on 16 February 2024). The FCA expects to implement the new listing rules in the second half of 2024. A consultation paper on new draft prospectus rules will follow later in 2024.

If you have any queries in relation to the impact of the listing regime proposals on shareholder claims, please get in touch with one of the contacts below or your usual HSF contact.