In December 2023, the Financial Conduct Authority (FCA) confirmed that the existing regime for related party transactions (RPT) will change significantly. 

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.

Related party transactions: current position  

Currently LR 11 sets out the safeguards which apply to:

• transactions and arrangements between a premium listed company and a related party; and
• transactions and arrangements between a premium listed company and any other person which may benefit a related party.

The safeguards in LR 11 are intended to prevent a related party from taking advantage of its position and also to prevent any perception that it may have done so.

RPTs: Under the current regime, if a premium-listed company enters into a related party transaction, the company must:

• make a notification in accordance with LR 10.4.1 R (Notification of class 2 transactions) that contains the details required by that rule and also:
  • the name of the related party; and 
  • details of the nature and extent of the related party's interest in the transaction or arrangement;
• send a circular to its shareholders containing the information required by LR 13.3 and LR 13.6;
• obtain the approval of its shareholders for the transaction or arrangement either:
  • before it is entered into; or
  • if the transaction or arrangement is expressed to be conditional on that approval, before it is completed; and
• ensure that the related party:
  • does not vote on the relevant resolution; and
  • takes all reasonable steps to ensure that the related party's associates do not vote on the relevant resolution.

Smaller RPTs: Less onerous requirements apply if each of the percentage ratios is less than 5%, but one or more of the percentage ratios exceeds 0.25%.

Small RPTs: LR 11 does not apply to small RPTs (any transaction or arrangement where each of the applicable percentage ratios is equal to or less than 0.25%).

Related party transactions: What’s changing?

The key change is that a related party transaction will no longer trigger a requirement for prior independent shareholder approval or a shareholder circular. 

If a related party transaction meets or exceeds the 5% threshold on the class tests (excluding transactions in the ordinary course of business): 

• The board will be required to approve the transaction, excluding any conflicted directors from taking part
• The company will be required to make a timely notification on the transaction (as soon as possible once terms are agreed) based on content set out in UKLR 8 (which will replace LR 11)
• The board will be required to state in the market notification that the transaction is “fair and reasonable” as far as its security holders are concerned, and that it has obtained written confirmation from a sponsor that the transaction is “fair and reasonable”

The FCA intends to publish new guidance on the exemption for transactions within the ordinary course of business. As with the guidance for the new significant transactions regime (see our post here: https://blog.burges-salmon.com/post/102ilht/uk-listing-regime-significant-transactions-by-companies-with-a-premium-listing), we hope that this guidance will simplify the analysis currently undertaken by issuers as to whether a transaction is within the scope of LR 11 or not.

If the proposals proceed in their current form, the related party requirements in DTR 7.3 will not apply to companies with shares listed in the new commercial companies category (which will replace the current split between the premium and standard segments).

Smaller RPTs (percentage ratios: 0.25% to 4.99%) will not trigger:

• the requirement for a fair and reasonable sponsor confirmation
• an announcement obligation

No requirement for sponsor guidance

An issuer will only be required to appoint a sponsor if the issuer wants to seek individual guidance from the FCA in respect of the FCA's requirements in UKLR, DTR or MAR for related party transactions or to seek a waiver, modification or substitution of the provisions of UKLR that apply to related party transactions, including the class tests.  A sponsor will need to be engaged by the issuer to provide advice in respect of the “fair and reasonable” opinion given by the board.

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.