On 20 December 2023, the Financial Conduct Authority (FCA) confirmed that the existing regime for Class 1 transactions will change significantly. 

Key features

The FCA has highlighted the following key features of its new proposals for “significant transactions”:

• No prior shareholder vote and no shareholder circular
• Enhanced market notifications when class tests are at ≥25%. The enhanced market notifications regime for transactions at ≥25%, is intended to provide key information including financial information, but will not mandate working capital statements or require the restatement of historical financial information
• The removal of the profits test and
• new (and very welcome) guidance on what constitutes “ordinary course of business”. 

The revised Listing Rules will not refer to “Class 1” transactions at all. Instead the focus will be on “significant transactions”. 

The FCA's detailed proposals are set out in CP23/31: Primary Markets Effectiveness Review: Feedback to CP23/10 and detailed proposals for listing rules reforms (fca.org.uk). This follows the publication of CP23/10: Primary Markets Effectiveness Review: Feedback to DP22/2 and proposed equity listing rule reforms (fca.org.uk) in May 2023.

Class 1 transactions: current position 

 Currently, a listed company with a premium listing must (in relation to a Class 1 transaction):

• make an announcement containing prescribed information
• send an explanatory circular to its shareholders and obtain their prior approval in a general meeting for the transaction and
• ensure that any agreement effecting the transaction is conditional on that approval being obtained.

These requirements are contained in LR 10.5.1R (Class 1 requirements). In addition:

• a Class 1 circular requires prior FCA review and approval before it can be sent to shareholders. LR 13 (Contents of circulars: Premium listing) sets out the requirements for the content and approval of Class 1 circulars and
• the sponsor regime also applies to Class 1 transactions (see LR 8.2 When a sponsor must be appointed or its guidance obtained and LR 8.4 Role of a sponsor: transactions.)

Significant transactions: What’s changing?

The three key headline points are:

• no compulsory prior shareholder vote 
• no requirement to produce a shareholder circular 
• no mandatory appointment of a sponsor.

Instead, a listed company must:

• continue to classify non-ordinary course transactions and
• when a transaction is classified as a significant transaction, make an announcement containing prescribed information - this will contain enhanced disclosures. These will be more detailed than the disclosure requirements which currently apply to Class 2 transactions.

The class tests and aggregation rules remain in place although, as trailed in CP23/10, the profits test has been removed. Different rules will apply for reverse takeovers and for transactions proposed by an issuer which is in financial difficulty.

What information will need to be disclosed when an issuer enters into a significant transaction?

Currently the FCA has suggested that an RNS announcement for a significant transaction would need to include:

• An enhanced form of the basic information which is currently required when an issuer with a premium listing enters into a Class 2 transaction (LR 10.4.1R) setting out, among other things:
  • details of any break fee arrangements
  • the effect of the transaction on the listed company including any benefits which are expected to accrue to the company, and any risks to the company, as a result of the transaction 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. 
• Certain elements of the financial information required for Class 1 circulars (LR 13.5) and a subset of the items included in the Table in LR 13 Annex 1. This includes the historical financial information on the target and the rules governing minimum standards around it. When financial information is not available, or is not available to the standard required, the FCA is currently proposing that the issuer should provide an explanation of how they have arrived at the price agreed for the acquisition or disposal and a statement by the board that it considers the consideration to be fair as far as the security holders of the company are concerned. 
• Some aspects of the Class 1 circular requirements from LR 13.4, including a statement of the effect of the transaction on the group’s earnings and assets and liabilities (LR13.4.1R(5))

The FCA notes that: “These disclosure requirements would be supported by an overarching obligation on the issuer to include any other relevant circumstances or information necessary to provide an understanding of, or enable the shareholders to assess, the terms of the transaction and its impact on the listed company.” It will be interesting to see whether this requirement works in practice or not given the echoes of the general duty of disclosure which is set out in Article 6(1) of the UK Prospectus Regulation (reproduced in PRR 2.1.1UK).

We expect that listed companies will want to consider these proposed contents requirements carefully with their advisers and provide the FCA with detailed feedback. 

Will formal sponsor approval be required before an announcement relating to a significant transaction can be released?

No. In CP23/10, the FCA noted that: "We do not propose to require sponsors to ‘sign off’ the announcement as compliant with ESCC category rules, in line with our current rules that do not require sponsors to sign off Class 2 announcements,..".

Will a sponsor declaration be required in respect of an announcement of a significant transaction?

No. In CP23/10, the FCA noted that: "We would not carry over the mandatory and private declaration from the sponsor to the FCA in relation to the Class 1 transaction in its current form in the ‘Sponsor Declaration for the Production of Circular’ under LR 8.4.12R(1). We consider this a proportionate change for ESCC category rules. In particular, some of the sponsor confirmations in the declaration may no longer be relevant in the context of the proposed changes to the company’s obligations on Class 1 transactions and corresponding changes to the sponsor’s role."

Will an issuer need to seek guidance from a sponsor when considering a significant transaction?

No. The FCA notes in CP23/31 at paragraph 6.73 that it is “proposing to remove the mandatory sponsor appointment more broadly from the transaction process. Based on the proposed approach of enhanced notification requirements for transactions, but no longer requiring circulars and a shareholder vote to obtain approval, we do not propose to require sponsor involvement in producing such disclosures nor to generally require issuers to appoint a sponsor to provide guidance on UKLR, DTR or MAR where a transaction may be a significant transaction.”

However, the FCA is proposing that an issuer must appoint a sponsor when it seeks individual guidance in relation to a significant transaction or requests an FCA waiver or modification of the requirements for significant transactions, including on the class tests.

Will the FCA review and approve a draft significant transaction announcement?

No. 

What’s happening to Class 2 transactions?

The concept of a Class 2 transaction will be removed from the Listing Rules.

What about reverse takeovers?

The FCA will keep its current requirement for an FCA approved circular and prior shareholder approval for transactions where the class tests are at ≥100% or involve a fundamental change in business. 

What action does a listed company need to take?

UK listed companies listing should:

• review and update their internal policies to reflect this change; and
• discuss the upcoming change with their M&A team.

Good news

The new regime for significant transactions should be good news for UK listed companies provided the contents requirements for significant transaction notifications are set at the right level. Why?

• First, the removal of this “super-equivalent” requirement for a prior shareholder vote will remove a requirement which previously placed UK listed companies at a competitive disadvantage when participating in M&A processes. 
• Second, a company will be free to determine the nature and extent of pre-transaction due diligence which it undertakes although it will need to obtain all of the information necessary to make the enhanced disclosures in the transaction announcement.

In the FCA's view these proposals should considerably reduce the regulatory burden on existing premium listed companies who wish to enter into significant transactions. 

Background

CP23/10 set out a blueprint for significant reform to the FCA's Listing Rules including significant changes to LR 10. In the context of the proposed changes to the rules for significant transactions, the FCA noted that:  "We recognise that some stakeholders may be concerned by our proposed removal of certain long-standing investor protections built into our premium listing segment, such as rules requiring companies to seek shareholder approval for certain transactions. We have considered this carefully and, on balance, we are not convinced there is sufficient evidence that these regulatory protections are either properly valued or essential to ensure well-functioning markets, particularly when we take into account international comparisons, the fact that UK investors deploy significant capital in these markets, and the data that is available on the benefit that the current UK systems delivers." 

Next steps

The FCA intends to gather views on the proposals until late March 2024 with a view to publishing final rules in the second half of 2024.

How can we help?

If you would like to discuss the changes to the UK Listing Regime, please speak to your usual contact at Burges Salmon or Nick Graves, head of the firm's Corporate Group.