Finance: overhaul of UK’s listing rules aims to balance risk and growth
New listing rules came into force in the UK in July – the most significant change to the regime in over 30 years. The UK’s Financial Conduct Authority (FCA) says the new rules aim to boost growth and innovation in the country’s stock markets by introducing ‘a new simplified regime that maintains high standards that compare well internationally’.
The number of listed companies in the UK has fallen by about 40 per cent since 2008. Between 2015 and 2020, the UK accounted for only five per cent of initial public offerings (IPOs) globally. This fall in listings has compounded a broader sentiment that London is increasingly losing out to other markets, such as the US and continental Europe. ‘The UK is dropping out of the shortlist for people who are not connected to the UK’, says Jan Willem Hoevers, Co-Chair of the IBA Securities Law Committee and a partner at De Brauw Blackstone Westbroek in Amsterdam.
Under the new rules, the previous ‘premium’ and ‘standard’ listing segments have been removed and replaced with a new ‘commercial companies’ category for equity share listings. For companies in this new category, shareholder votes won’t be required on significant and related party transactions but will still be needed on reverse takeover transactions and cancellations of listing. By keeping shareholder votes on some transactions, the FCA aims to balance moving to a disclosure-based philosophy with ensuring that investor protections remain in key areas. The UK Corporate Governance Code will apply to companies in the new category.
The FCA tells Global Insight that ‘the [previous] regulatory regime was deemed complex and quite hard to understand’. It says the premium and standard segments were making it difficult to compare the UK regime with other markets and the need for shareholder votes on certain transactions had become a barrier to issuers considering a London listing.
‘This is good news for UK-listed companies’, says Simon Tysoe, a partner at Slaughter and May in London. ‘It simplifies the rulebook and makes it easier for them to compete in global M&A, but still strikes the right balance in maintaining the high standards of transparency and corporate governance that are key strengths of the UK market.’
Tom Fagernäs, Co-Chair of the IBA Securities Law Committee and a partner at Krogerus in Helsinki, believes that ‘any relaxation [of the rules] is beneficial for raising capital in the UK and ultimately listing in the UK’.
Any relaxation [of the rules] is beneficial for raising capital in the UK and ultimately listing in the UK
Tom Fagernäs
Co-Chair, IBA Securities Law Committee
Under the new regime, the FCA will be more permissive towards companies listing with dual class share structures or weighted voting rights. The regulator says the previous approach to dual class shares was unattractive to founder-led companies in particular, because the founder may want to keep a controlling hand on the strategy of the company. The track record requirement for eligibility has also been removed. This change aims to enable early-stage start-up companies to come to the market without an extensive track record.
The new listing segment will maintain the sponsor regime that was part of the old rules. The FCA says this is a critical check on companies to ensure they’re meeting its high standards. It also believes the regime enables skilled advisers to offer good advice to new issuers coming to market. In response to concerns that the regime was too onerous, the FCA has provided additional guidance to sponsors covering how it expects them to meet their obligations.
The regulator acknowledges the changes create more risk for investors but believes it has balanced this against the need for greater growth. It argues that moving to a more disclosure-based regime will empower shareholders to make informed decisions about where to invest and the associated risks. Mark Chalmers, counsel at Davis Polk in London, says that ‘the pendulum has swung away from placing more obligations on issuers […] and it’s placing more of an onus on shareholders themselves to do their own diligence’.
While the FCA says its rule changes aim to align the UK regime more closely with international market standards, it isn’t trying to replicate another market. Rather, it’s trying to create a level playing field by removing unnecessary hurdles for UK issuers. The shareholder approvals that have been dropped, for example, were criticised for failing to offer an advantage to UK-listed companies, instead representing an extra process burden that could put them at a disadvantage in a competitive auction process.
There are other factors beyond the listing rules that make different markets attractive to new issuers. For example, the US markets are perceived to have more liquidity than that of the UK and this sentiment is powerful when it comes to deciding where to list. Higher rates of executive pay in the US can also motivate companies to list there. Issuers will also consider the extent to which the business will be understood and therefore accurately valued by research analysts in a particular market. Finally, Brexit has affected the way the UK market is viewed and therefore its ability to compete internationally.
Changing the listing rules is one aspect of a broader programme of work the FCA is undertaking with the aim of ‘strengthening the UK’s position in the global wholesale markets’. The regulator is currently consulting on proposed rules to establish a new public offers and admissions to trading regime, which will replace the existing UK Prospectus Regulation. Under the proposals, a prospectus wouldn’t be required when a company raises further capital after admitting securities to public markets, except in limited circumstances.
In July, the regulator also confirmed new rules that provide asset managers with greater freedom in how they pay for investment research, by allowing the ‘bundling’ of payments for research and trade execution. This new payment option is compatible with rules in other jurisdictions, making it easier for asset managers to buy research across borders.
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IBA Annual Conference in Mexico City attracts delegates from over 100 jurisdictions
The IBA hosted its Annual Conference for 2024 in Mexico City from Sunday 15 to Friday 20 September. This premier event saw legal professionals from over 100 jurisdictions arrive for business meetings and to attend over 200 sessions run by the IBA’s committees and fora. This year, 30 of these sessions focused on artificial intelligence, a crucial issue for the legal profession at this time.
Other sessions covered subjects ranging from the climate crisis and international trade to the rule of law and democracy. Meanwhile, many delegates took advantage of the chance to forge new relationships with Mexican peers – or strengthen existing ones – while in the city.
The Annual Conference’s opening ceremony featured remarks from IBA President Almudena Arpón de Mendívil Aldama; Ernesto Zedillo, President of Mexico from 1994–2000; and Norma Piña Hernández, the President of Mexico’s Supreme Court of Justice, who was honoured with the first IBA Impact Award. ‘The IBA presence in Mexico takes place at an historic moment and at a special day, the United Nations Day of Democracy, [intended] to review the state of democracy in the world’, said Arpón de Mendívil in her speech.
Meanwhile, the popular ‘A Conversation with…’ series returned, with interviewees including Ambassador John J Sullivan, former US Deputy Secretary of State and former US Ambassador to the Russian Federation, and Liev Schreiber, the co-founder of humanitarian aid start-up BlueCheck and an actor, director and writer.
The IBA presented its Pro Bono Award to Vineetha MG of Samvad Partners in Mumbai, honouring her two decades of commitment and the impact her work has made, while the IBA Outstanding Young Lawyer Award was given to Pakistan’s Mashal Aamir for her work on issues ranging from women and child prisoners to vulnerable witnesses.
IBA and CAIDP release groundbreaking report on AI and the legal profession
In September, the IBA and the Center for AI and Digital Policy (CAIDP) launched a new report entitled The Future is Now: Artificial Intelligence and the Legal Profession. This comprehensive study explores the transformative impact of artificial intelligence (AI) and offers critical insights into the governance and ethical deployment of such technologies in legal practice.
The report’s launch took place on 19 September during the 2024 IBA Annual Conference in Mexico City, with Marc Rotenberg, Executive Director of CAIDP – a worldwide network of AI policy experts and human rights advocates – appearing as a guest speaker.
The report states that ‘the impact of AI on the legal profession is far-reaching, with implications for the practice of law worldwide and for the governance of AI’. It emphasises the necessity of the legal community staying abreast of technological advancements to maintain the integrity and efficacy of legal practices globally.
Key findings from the report include that 48 per cent of survey respondents support regulation around the use of AI in the legal profession; 91 out of 210 law firms had policies in place on how AI is used in their organisations; and 69 per cent of survey respondents were unaware of the extent to which AI regulation would impact their firms. Among the challenges facing the legal profession in respect of AI are its influence on the hiring practices, structure and client fee schedules of law firms, and the need to effectively managing data governance, security, intellectual property, privacy and policy development.
The report is built on previous work completed by the Artificial Intelligence Working Group of the IBA Alternative and New Law Business Structures (ANLBS) Committee. The Group has recently updated its global report on Guidelines and Regulations to Provide Insights on Public Policies to Ensure AI’s Beneficial Use as a Professional Tool.
Access the Future is Now report here.
The ANLBS Committee guide is here.
Latest podcast: Outsourcing insights – navigating IT pitfalls
The latest Global Insight podcast covers a recent case from the UK – the Post Office Horizon IT inquiry. Between 1999 and 2015, more than 700 Post Office operators were prosecuted for theft and false accounting in what has been considered one of the most widespread miscarriages of justice in UK history.
In mid-2024, the UK enacted a law quashing the convictions of these sub-postmasters after many were wrongly prosecuted for theft and fraud due to accounting errors in the software – Horizon – used by their employer, the Post Office. This scandal, alongside other recent controversies, has placed the spotlight on IT outsourcing projects and the potential pitfalls, both for buyers and for the public.
In the podcast, three experts discuss the impact of the inquiry:
- Paul Chapman, Senior Fellow, Said Business School at the University of Oxford;
- Vik Khurana, Vice-Chair of the IBA Outsourcing and Managed Services Subcommittee and IT partner at Bristows law firm in London; and
- Tom Denwood, Chief Digital Officer at Population Health Partners in New York.
The inquiry is still ongoing. A statement from the Post Office reads: ‘We are deeply sorry for the suffering caused to so many people by Post Office’s past actions’. Fujitsu says that it ‘regards this matter with the utmost seriousness and offers its deepest apologies to the sub-postmasters and their families’.
Listen to the podcast here.
Recent publications from the IBA Arbitration Committee
Following its update to the Guidelines on Conflicts of Interest in International Arbitration earlier this year, the IBA Arbitration Committee has recently published several documents to assist arbitrators and counsel.
The IBA Report on Insolvency and Investment Arbitration considers the intersection between insolvency and investment arbitration, covering specific issues of jurisdiction, standing, attribution, merit, damages, causation and procedure.
The Committee has further updated the IBA Toolkit on Insolvency and Arbitration. First published in 2021, the Toolkit offers guidance in situations where a party to arbitration proceedings is also subject to insolvency proceedings in one or more jurisdictions.
Site visits can be a helpful procedural tool in international arbitrations. The Site Visit Model Protocol, prepared by the IBA Arbitration Committee Working Group, aims to assist parties in organising site visits, and sets out the Working Group’s understanding of best international practice for the conduct of site visits.
Access these publications and more on the IBA Arbitration Committee page here.
New reports released on gender disparity in the legal profession
The IBA Legal Policy & Research Unit (LPRU), in collaboration with the LexisNexis Rule of Law Foundation, has released a new report focusing on gender disparity in the legal profession in Mexico. The 50:50 by 2030: A longitudinal study into gender disparity in law – Mexico results report is the ninth in the series.
Of the studies conducted so far, Mexico ranks eighth, both in the overall percentage of female lawyers (34 per cent) and in the percentage of female lawyers at senior level (30 per cent).
The report closely follows the publication of the Brazil report, which revealed that 44 per cent of all lawyers in Brazil are female, ranking the jurisdiction fifth so far. In the public sector, Mexico and Brazil share similar data; Mexico has 35 per cent female public sector lawyers overall, and Brazil has 43 per cent.
Both studies conclude there is still further development needed to achieve parity at both overall and senior levels. The IBA Women Lawyers’ Committee has published the Toolkit for Male Champions Roundtables for this purpose, providing a guide to what individuals can do to accelerate the rate of progress on gender equity in the legal profession.
Download the Mexico report here and the Brazil report here.
Download the Toolkit for Male Champions Roundtables here.
IBA Banking & Financial Law Committee publishes principles on cross-border closing opinions and updates its fintech guide
The IBA Banking & Financial Law Committee has joined forces with the Legal Opinion Committee of the Business Law Section of the American Bar Association (ABA) to publish a set of good practice principles on cross-border closing opinions. The document, published in September, is the result of the work of a joint taskforce between the two bodies and aims to improve the practices of lawyers globally relating to the giving of, and advising recipients of, closing opinions in cross-border transactions.
The Committee has also made a major update to its global fintech guide, entitled Fintech: how is the world shaping the financial innovation industry? This significant report features dozens of jurisdictions, with the 2024 edition adding more and updating those covered in the 2023 version of the guide. The report provides readers with an understanding of the diverse legal frameworks that govern fintech around the world.
Access both documents here.
Modern slavery: court judgment forces UK prosecutors to reconsider supply chain-linked investigations
The Court of Appeal in London has delivered a landmark ruling that has removed certain legal barriers to investigations into businesses suspected of profiting from alleged forced labour in China.
A panel of three appeal judges concluded that the UK’s National Crime Agency (NCA) had acted unlawfully when declining to investigate companies accused of importing cotton into the UK from the Xinjiang region in China where Uyghur Muslims and other Turkic minorities are allegedly forced to work and subjected to abuse, torture and other human rights violations.
The World Uyghur Congress and Global Action Legal Network (GLAN), which brought the case, had asked the Court to order the NCA to reconsider whether companies importing cotton produced by Uyghurs in Xinjiang could be committing a money laundering offence under the UK’s Proceeds of Crime Act.
The ruling overturned a previous judgment by the High Court in 2023, which found that the NCA’s inability to identify specific criminal property from the available evidence justified its decision not to launch a money laundering investigation. The appeal judges also shattered a common interpretation of a provision in the money laundering statute, the ‘adequate consideration defence’, ie, that businesses and their suppliers could avoid criminal liability for trading in suspected illicit goods if they paid a fair, market price for them. The NCA now must reconsider its decision not to open an investigation.
The High Court and the appeal judges accepted that there’s substantial evidence that widespread human rights abuses are occurring in the Xinjiang region, where 85 per cent of Chinese cotton is grown. The UN, an independent people’s tribunal in London and the US government have all at least concluded that China may have committed crimes against humanity in Xinjiang.
With the test for suspicion a low bar, due diligence can be used as a tool to understand mitigating actions put in place by supply chain partners
Sarah Ellington
Newsletter Officer, IBA Business Human Rights Committee
Diana Czugler, Young Lawyers’ Committee Liaison Officer for the IBA Criminal Law Committee and a senior associate at Peters & Peters in London, says that while the ruling is in line with what the legislation intended – to prevent the laundering of criminal property – it has created more questions than answers about the practical consequences for businesses.
‘It will be interesting to see how the ruling will affect businesses’ ability to use money suspected of stemming from human rights violations or other crimes going forward,’ she says. ‘It will hugely restrict the extent to which reliance can be placed on the adequate consideration defence once the funds have been received, and where the recipient has knowledge or suspicion of the funds being or representing the proceeds of criminal conduct’.
Czugler predicts an uptick in companies requesting compliance advice from lawyers and seeking a defence against money laundering (DAML) from the NCA – a process whereby the agency has seven days to decide whether to grant consent and absolve a business of potential criminal liability for a specific transaction – because of the increased uncertainty they face.
Sarah Ellington, Newsletter Officer for the IBA Business Human Rights Committee and a partner at Watson Farley & Williams in London, believes the increased exposure to legal risk, paired with the low threshold for suspicion – which existed in case law before the ruling – will encourage companies to ramp up their due diligence efforts. ‘With the test for suspicion a low bar, due diligence can be used as a tool to understand mitigating actions put in place by supply chain partners which would allow companies to allay concerns highlighted by initial risk mapping exercises,’ she says.
While the theoretical risk of prosecution has undoubtedly grown, it’s unclear whether the ruling will lead to the NCA opening money laundering investigations into companies for allegedly importing cotton produced by Uyghurs in Xinjiang. The NCA told Global Insight that it doesn’t plan to appeal against the ruling and ‘is taking all relevant information, along with the judgment of the Court of Appeal, into account in its decision making process’.
The GLAN and the World Uyghur Congress expect the judgment to ‘lead to full investigation into imports from the Uyghur region, and a commitment from the NCA to stopping tainted goods entering UK markets’. They add that ‘evidence suggests’ that Uyghur cotton ends up in well-known high street fashion stores.
Ellington says she doubts there will be a big increase in money laundering investigations linked to Uyghur cotton imports being opened by the NCA because the appeal judges only overturned two narrow legal points, and the agency can rely on other reasons for not opening an investigation. Czugler says potential prosecutions might be slowed by the challenges inherent to investigating human rights abuses abroad, including regarding the collection of evidence.
She says the likely increase in DAML requests following the judgment might also slow investigations down. ‘If there is a significant uptick of businesses filing SARs [suspicious activity reports] and seeking DAMLs, that will be a big task for the regulator to process,’ says Czugler.
Lucy Blake, an investigations partner at Jenner & Block in London, says the appeal ruling may give other human rights groups more confidence to pressure law enforcement agencies to act on environmental, social and governance (ESG) issues, for example the climate crisis.
In 2021, a UK government response to a parliamentary committee report said that introducing more detailed reporting requirements and fines for non-compliance into the country’s Modern Slavery Act – which requires businesses with a turnover of £36m or more to publish an annual statement on their efforts to prevent modern slavery in their supply chains – was a ‘priority’ to deter businesses from importing Uyghur-made cotton. These reforms, however, haven’t yet been implemented and the new Labour government hasn’t so far announced plans to introduce them.
Outside the UK, pressure on companies to do more to root out human rights harms and environmental misconduct in their supply chains has risen. The EU recently introduced a raft of new legislation requiring companies to be more transparent and implement substantive measures to tackle slave labour and climate issues in their business operations. In 2021, the US passed the Uyghur Forced Labor Prevention Act, prohibiting the import of goods from Xinjiang. ‘[The UK appeal ruling] is not happening within a vacuum,’ Blake says. ‘Companies need to take steps to analyse, vet and prevent abuses’.
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