Executive Summary
The UK Listing Review chaired by Lord Hill (Hill Report) forms part of the Chancellor’s plan to bolster the UK’s world-leader status in FinTech in the light of Brexit and strong competition from other leading world markets.
Published on 3 March 2021, it follows the recent Kalifa Review which laid out a strategy for the UK Fintech sector to mitigate the threats posed by attractive opportunities in competing countries (see our article on the Kalifa Review here). Whilst there are some clear crossovers with the Kalifa Review, the Hill Report is by no means focused on FinTech. Rather it is a wholesale review of London’s global status, the opportunities following Brexit, and the need for immediate and ongoing reform to take advantage of Brexit.
The Hill Report is 88 pages long, and is available for download here. We have set out a summary of it in this article.
The Hill Report’s key recommendations include:
- Allowing dual class share structures on the London Stock Exchange’s premium listing segment and giving directors and founders enhanced voting rights over certain decisions.
- Reducing free float requirements from 25% to 15% and altering the ways companies can demonstrate liquidity.
- An annual report on the ‘State of the City’ to be delivered to Parliament by the Chancellor.
- A fundamental review of the prospectus regime to ensure that admissions to a regulated market and offers to the public are treated separately.
- Liberalising the rules regarding special purpose acquisition companies (SPACs), with appropriate safeguards for investors.
The Hill Report makes a number of comments and recommendations about improvements to regulation and the FCA’s approach to regulation. In response the FCA has publicly supported the Hill Report and has stated that it aims to publish a consultation paper by the summer of 2021.
Introduction
The Hill Report emphasizes the dominance of finance and the ‘old economy’ in the composition of the FTSE index and highlights the lack of ‘companies of the future’ listing on the UK public markets. It makes a series of recommendations aimed at improving and reforming the listing process across all sectors.
In calling for reform, the Hill Report stresses the need to seize the financial benefit offered by the UK’s booming sectors to encourage them to list in the UK rather than in the, arguably, more appealing competing markets such as the US.
Balancing long term global ambitions with the shorter term need for urgent reform, the Hill Report proposes a phased approach with a rolling programme of ‘dynamic’ legislation and regulation which would be under constant appraisal and subject to change based on current market circumstances.
The Recommendations
The Hill Report makes 15 recommendations under the following seven categories:
- Monitoring and delivering results
- Improving the environment for companies to go public in London
- Re-designing the prospectus regime
- Tailoring information to meet investor needs better
- Empowering retail investors
- Improving the efficiency of the listing process
- The wider financial ecosystem
Monitoring and delivering results
The sentiment that the UK markets should offer a more dynamic regulatory package for business is echoed in both the Kalifa Review and the Hill Report as a crucial point of action if the UK is to maintain and improve its global status as a financial centre.
Recommendation 1: The Chancellor should present an annual report to Parliament on the ‘State of the City’ outlining the measures taken to promote the attractiveness of the UK as a well-regulated global financial centre. The Hill Report places an emphasis on the UK displaying a dynamic approach to its capital markets and creating an environment to attract the growth companies of the future to list and grow in the UK. The process of preparing the annual report will also encourage vital cross-departmental communication.
Recommendation 2: Countries such as Australia, Singapore, Hong Kong and Japan have competitiveness or growth as a regulatory objective. Other European banking institutions have similar objectives. The FCA’s objectives should go beyond ensuring that UK markets are well regulated and should extend to creating an environment that encourages companies to list due to the UK’s supportive and dynamic approach.
Improving the environment for companies to go public in London
If the UK wishes to attract companies to list in London at an earlier stage of their growth cycle, it must broaden the listed investment landscape for institutional and retail investors and increase the attractiveness of the UK market when companies are deciding where to IPO.
The Kalifa Review also outlines that the current IPO process does not adequately address the needs of fast growth companies and that addressing the investment landscape – in particular the growth capital funding gap – will positively impact the Fintech and Decentralised Finance (DeFi) sectors and will lead to a greater appetite to IPO in the UK.
Recommendation 3: Under the current rules, dual class share structures are not permitted on listing. Lord Hill acknowledges that there is a greater desire for founder-led companies, and for CEOs and others in fast growth sectors to keep hold of power so that they can continue to execute their vision for how the company should evolve while still allowing others to share in that growth. Dual listing should nurture that and permitting it would encourage those companies to consider listing in the UK.
Companies with dual class share structures should be allowed to list in the premium listing segment provided they adhere to high corporate governance standards. The conditions placed on them would include:
- a maximum duration of five years;
- a maximum weighted voting ratio of 20 to 1;
- requiring a holder of the Class B shares to be a director of the company;
- voting matters being limited to ensuring the holder(s) are able to continue as a director(s) and able to block a change of control of the company while the DCSS is in force; and
- limitations on transfer of the B class shares.
Recommendation 4: Although 54% of European growth capital was raised on AIM in 2020, it serves a different purpose from the LSE’s Main Market. The standard listing segment of the Official List should be re-branded and re-launched with flexibility at its core to promote companies of all types listing in London and to attract an increasingly large cluster of like-minded companies, generating its own momentum whilst attracting others to join.
Recommendation 5: The current free float requirement is one of the largest deterrents to companies when they assess where to list, especially in high growth companies. Making available a quarter of their equity is a daunting prospect, particularly if the company is already of significant size or there are not enough willing sellers.
The current definition of shares in public hands should be reviewed:
- to reduce the minimum free float requirement. The definition should be widened to increase the threshold above which investment managers and other institutional shareholders are excluded from contributing towards the free float calculation from 5% to 10%;
- to include non ‘inside’ shareholders;
- to exclude shareholders who are subject to lock up agreements of any durations so that those shares are not accessible as part of the regular liquidity pool.
The FCA should also reduce the required percentage of shares in public hands from 25% to 15% for all companies across both premium and standard listing segments, as well as allowing companies of different market caps to use alternative measures to the absolute percentage of 15% to demonstrate sufficient liquidity in their shares following listing.
The free float reduction also features in Kalifa Review, stating that private funding has been crucial to the success of the UK as a Fintech hub and noting that an area of improvement and development for the UK is through a free float reduction.
Recommendation 6: Revision and relaxation of the Listing Rules which require trading to be suspended in the shares of SPACs on the announcement of a potential acquisition. The Hill Report advocates additional protections for shareholders at the time of acquisition, such as a shareholder vote and redemption rights.
Formed with a view to making an acquisition, SPACs are cash shell companies in which investors buy shares in anticipation of the management team making a successful acquisition based on an investment profile described in its prospectus.
SPACs are popular in the US due to their speed of listing and ability to offer more options for going public. Lord Hill draws stark contrast between the UK market – which only saw four SPACs list in 2020 raising a total of £0.03 billion – and the US market, which in 2020 saw 248 SPAC vehicles list raising the US$ equivalent of £63.5 billion.
The Hill Report considers the reason for this to be FCA rules which can require trading in the SPAC to be suspended when it announces a proposed acquisition, stating that the risk of becoming indefinitely locked into an investment poses a fundamental deterrent for the use of these types of vehicle. Lord Hill recommends that the FCA should remove the rebuttable presumption of suspension, replacing it with information and disclosure requirements, investor rights in relation to voting and redemption and strict measures to safeguard market integrity in relation to SPACs.
Re-designing the prospectus regime
Recommendation 7: A fundamental review of the prospectus regime by HMT to bring it in line with the breadth and maturity of UK capital markets and to evolve the types of businesses coming to market as well as those that are already listed.
The current regime discourages retail investors and hinders the IPO process through cumbersome prospectus requirements. Further issuances by companies that are listed or quoted should be either completely exempt from requiring a prospectus or be subject to fewer requirements.
As a minimum, consideration should be given to the following areas:
- updating requirements so that admission to a regulated market and offers to the public are treated separately;
- altering the prospectus exemption thresholds function so that documentation is only required where appropriate in a given transaction and suits the circumstances of capital issuance; and
- use of alternative listing documentation where appropriate and possible, e.g. in the event of further issuance by an existing listed issuer on a regulated market.
Recommendation 8: The development of a system to determine whether a foreign issuers’ home prospectus is suitable through some form of “equivalence” regime. An effective way for the Government and regulators to promote dual and secondary listings in the UK is to make regulatory allowances for prospectuses which have been drawn up in other jurisdictions.
Tailoring information to meet investor needs better
Recommendation 9: Facilitate the provision of forward-looking information by issuers through an adjustment of the level of liability associated with prospectuses under FSMA to allow directors to publish and stand behind their forward-looking models.
Companies are currently required to provide three years of backward-looking financial information in their prospectus and have very little ability to give forward-looking information. This is especially relevant in fast-growth tech sectors such as Fintech and DeFi in which the value can be found in their future capabilities rather than their current position. Forward-looking information is the key category of information that investors seek when a company is carrying out private funding rounds and it seems perverse that the flow of that information is curtailed just as a company moves to list.
Recommendation 10: Extend the provisions afforded to scientific research-based companies in relation to their compliance with the revenue-earning requirements in the premium listing segment to other high-growth, innovative companies from differing sectors to enable more companies to prove their maturity in other ways rather than through positive revenue earnings.
Recommendation 11: Amend the requirement for historical financial information covering at least 75% of an issuer’s business for premium listings so that the test becomes only applicable to the most recent financial period within the three-year track record.
Numerous companies rule themselves out of listing in the premium segment as this 75% requirement is too onerous for them to manage, is unhelpful towards investors and serves only to increase the burden on companies for no gain.
Empowering retail investors
According to the Automatic Enrollment Evaluation Report 2019, the number of employees that have exposure to capital markets has gone from 10.7 million in 2012 to 18.7 million in 2018. Harnessing these investors effectively is crucial to creating and fostering a stronger equity culture in the UK.
Recommendation 12: Technology is used to buy and sell shares on smart phones, actionable within seconds and a new generation of retail investor will expect to use technology to enable investor involvement in corporate actions.
The new generation of retail investors have greater expectations on a smooth process for registering shareholder views and they may be active in different ways than the previous traditional investor might have been. For example, using their share ownership to express broader social views as demonstrated in the rise of Environmental, Social and Governance investment products.
Recommendation 13: The inefficiencies in the market when speed is of the essence leaves companies with two options:
- a full pre-emptive offer through either a rights issue or an open offer (and respecting the pre-emption rights of existing shareholders). This requires a prospectus that needs to be approved by the regulator and a two-week legal minimum for the offer to be open; or
- quasi private placing which restricts the offer to institutional investors and a limited number of retail investors, to avoid publishing a prospectus using existing approvals from their shareholders to waive pre-emption rights or alternatively using a cashbox structure.
Reinstate the Rights Issue Review Group to improve the efficiency of further capital raising by listed companies and to remove the barrier for retail investor participation in the markets, and consider whether technological advances mean alternative or additional measures could be taken.
Improving the efficiency of the listing process
Recommendation 14: To promote speed-to-market, the conduct of business rule in the FCA Handbook that unconnected research analysts must withhold the publication of their research for seven days following an announcement of the intention to float, should undergo an impact assessment by the FCA to establish whether it is having its intended effect.
In practice this rule has not led to any significant increase in research coverage by unconnected analysts but has contributed to detrimental side effects, including increased execution risk that arises from an up to five week public phase of the IPO (compared with four under the previous rules) as well as time and costs implications for the issuer.
Wider financial ecosystem
Recommendation 15: Other elements to increase the attractiveness of the UK listing environment include:
Unlocking pension investment as a source of finance by channeling some of the capital held in pension schemes towards companies trying to list.
The Kalifa Review also highlights a need to unlock institutional capital such as a portion of the £6 trillion in UK private pension schemes in order to promote investment in fast-growth tech companies and Fintech start-ups.
A competitive tax environment, focusing on the equilisation of debt and equity funding so that tax treatment for rapidly growing companies is more effectively structured.
Creating a competitive tax environment resonates with the Kalifa Review which proposes tax incentives for founders of Fintech companies.
Market funding for SME research which is vital to ensure information is available to investors for them to make their investment decisions.
The Hill Report also touches on repealing some of the MiFID-II rules but comments that this goes beyond the scope of the review.
Rosenblatt can help
We have a wealth of experience in capital markets, acting for issuers, brokers, nomads and other corporate advisers, across diverse sectors and closely collaborate with institutions, large and small companies (both public and private), start-ups, scale-ups and individual entrepreneurs. Rosenblatt advises on all aspects of Fintech and DeFi, and regulatory law.
Contact us
Should you have any questions about the Hill Report or wish to discuss its impact on your business please get in touch with your usual contact at Rosenblatt or the authors named below.
Authors
Laura Clatworthy, Partner (Laura.Clatworthy@rosenblatt-law.co.uk)
Jon Lovitt, Partner & Head of Corporate (Jon.Lovitt@rosenblatt-law.co.uk)
James Bateman, Trainee Solicitor (James.Bateman@rosenblatt-law.co.uk)
