Finance: overhaul of UK’s listing rules aims to balance risk and growth

Rachael JohnsonWednesday 2 October 2024

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’.

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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Modern slavery: court judgment forces UK prosecutors to reconsider supply chain-linked investigations

Alice Johnson, IBA Multimedia Journalist

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. 

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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