Listing Rules a few tweaks around the edges

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1 Listing Rules a few tweaks around the edges The FSA recently published a consultation paper proposing wide-ranging amendments to the Listing Rules. The proposed changes impact on several areas including the sponsor regime, reverse takeovers, transactions, circulars, financial information and premium listings. The FSA also helpfully plans to incorporate into the Listing Rules some of the guidance currently contained in its Technical Notes. The proposals likely to be of greatest practical effect are summarised below, with details of further proposed changes set out in the attached Appendix. Sponsors Sponsors who are also nominated advisers in relation to AIM companies will recall the introduction of the AIM Rules for Nominated Advisers in February 2007 which were stated to codify best practice for nomads. These proposals from the FSA, which seek to clarify its expectations of sponsors, may be viewed in a similar vein. The proposed changes will also provide the FSA with a greater ability to take appropriate action against a sponsor. Full details of the proposals are set out in the attached Appendix but sponsors will not be surprised to discover that there will be a new Principle requiring them to act with honesty and integrity. Reverse takeovers The FSA intends to make its requirements in relation to reverse takeovers more proportionate by, for example, reducing the information requirements required for a suspension to be avoided and reducing the eligibility requirements following a cancellation of listing. In addition, there will be a new requirement, codifying existing market practice, for an issuer to contact the FSA as soon as possible once a takeover is in contemplation, to discuss if a suspension of listing is appropriate. Transactions Share buybacks The proposed new rules will remove the prohibition on a listed company effecting share buybacks above 15% of any class of its shares other than by way of a tender offer, and provide instead that a listed company will be able to purchase 15% or more of any class of its own shares provided the full terms of the share buyback are approved by shareholders. In order to ensure that management and substantial shareholders cannot implement a share buyback to concentrate control of a company among certain existing holders, the new rules will require companies to explain the potential impact of a proposed share buyback, including whether control may be concentrated following the transaction. Class tests Under the proposals, there will no longer be a concept of a class 3 transaction since the FSA considers that, as well as resulting in immaterial information being disclosed to the market, the current notification requirements do not provide any additional value above the disclosure obligations in Chapter 2 of the Disclosure and Transparency Rules in relation to pricesensitive information. Circulars The FSA is concerned that class 1 circulars often disclose a vast number of risks that are not material to the consideration of the proposed transaction. The proposed new rules will therefore clarify that a class 1 circular need only disclose those risk factors which are material to the proposed transaction, new risks or changed risks to the group as a consequence of the transaction.

2 In response to the FSA's concern that issuers sometimes send out circulars containing information material to a shareholder vote just prior to shareholder meetings, the new rules will clarify that a circular must be posted to shareholders as soon as it has been approved and no later than seven days before the meeting, so that shareholders are allowed sufficient time to review and consider the circular before voting. There will be a new requirement to send a supplementary circular to shareholders in the event of a significant change or new matter which arises following the publication of a circular but before the shareholder meeting is held and which constitutes "necessary information" to allow shareholders to make a properly informed decision on the matters to be voted upon. This will apply to all transactions where a vote is expressly required under the Listing Rules. Premium listing wider issues The FSA notes the debate about the nature of the premium listing standard, largely driven by high profile listings of international issuers, and, in particular, concerns about the free float requirements in the Listing Rules. The consultation comes just a month after FTSE announced it was raising its free float threshold for inclusion to all of its UK indices from 15% to 25%. The FSA is considering whether the premium listing standard needs to be further enhanced and is inviting comments on what changes, if any, are necessary to provide additional protection to investors. Its suggestions include giving minority shareholders rights of veto over important resolutions; introducing a new free float requirement which effectively allows minority shareholders to determine the governance arrangements of the company; and strengthening the rules on related party transactions and disclosures. Timing The consultation period closes on 26 April The FSA intends to publish its feedback on the specific proposals in the summer and for the rules to come into effect shortly afterwards. For further information on the topics mentioned in this note, please contact Spencer Summerfield, Andrew Gillen, Aaron Stocks or your usual contact at the firm. Travers Smith February 2012 Travers Smith 10 Snow Hill London EC1A 2AL Tel +44 (0) Fax +44 (0) Spencer Summerfield spencer.summerfield@traverssmith.com +44 (0) Andrew Gillen andrew.gillen@traverssmith.com +44 (0) Aaron Stocks aaron.stocks@traverssmith.com +44 (0)

3 APPENDIX FURTHER PROPOSED CHANGES Whilst there is no certainty that all of the FSA's proposed changes will be implemented, we have set out below details of the current proposals. Sponsors Sponsors will be required to provide the FSA with any explanation or confirmation that it reasonably requires (and within such time limit as it reasonably requires) to ensure that an issuer is complying with the Listing Rules. A sponsor will be required to take "all reasonable steps" to ensure that any communication or information provided to the FSA is, "to the best of its knowledge and belief", accurate and complete in all material respects. The definition of "sponsor services" will be extended to include "all the sponsor's communications with the FSA in connection with the service", which, in turn, means that the Principles for Sponsors will apply to all communications (whether written or oral) between the FSA and a sponsor in connection with a sponsor service. The FSA will extend the circumstances in which a sponsor must be appointed to capture all instances where sponsors are required to provide a key confirmation or assurance to the FSA, and to include other services provided to premium listed companies, for example providing the "fair and reasonable" statement required for a related party circular. There will be a new Principle for Sponsors requiring them to act with honesty and integrity in relation to a sponsor service. There will be a new specific obligation on premium listed companies and applicants to co-operate with their sponsor to enable the sponsor to discharge its obligations. The new rules will clarify that a sponsor must, as part of its ongoing conflicts checking procedures, take all reasonable steps to identify conflicts of interest that could adversely affect its ability to perform its functions. New notification requirements will be imposed on sponsors, for example notifying the FSA of information which they reasonably believe could adversely affect market confidence in the sponsor regime. Sponsors will be required to retain accessible records which are sufficient to demonstrate the basis on which sponsor services have been provided. The requirement for a sponsor to carry out a regular review will be removed, as this duplicates the requirement for a sponsor to meet the approval criteria at all times. Under the proposals, there will be a new obligation for a sponsor to notify the FSA where it identifies or otherwise becomes aware of material deficiencies in its sponsor systems and controls (which would currently be identified in the annual review). Financial information Under the new rules, issuers will be able to choose whether they include interim and quarterly financial information in a circular. The rules will be amended to limit the date of admission of a company's securities to three months (as opposed to the current twelve months) after the date of the prospectus this will limit the age of the financial information provided to nine months as at the date of admission. The FSA will clarify that the eligibility requirements in Chapter 6 of the Listing Rules will not apply where an existing premium listed company sets up a new holding company, provided that there is no transaction being undertaken that would increase the assets or liabilities of the group. The new rules will clarify the financial information required where class 1 acquisitions and disposals involve holdings that will not be or have not been consolidated in the issuer's group accounts. The new rules will require a valuation report in a class 1 circular where financial information is required but is unavailable or 3

4 inappropriate (for example, in relation to the acquisition of an investment that is not admitted to an investment exchange). Issuers will be required to make specific disclosures in respect of synergy benefits, as the FSA is concerned that the current requirements relating to synergy benefits are insufficient to allow investors to be fully informed about the status, compilation and reliability of such figures. The new rules will clarify that financial information on companies acquired by targets should represent at least 75% of the enlarged target, or in the case of a reverse takeover, 75% of the enlarged group. The rules on profit forecasts will be extended to class 1 disposals and will be amended to provide that where a profit forecast or estimate is no longer valid, it must still be included in the class 1 circular, together with an explanation of why it is no longer valid and why reassessment of it is not necessary to comply with the Listing Rules. To reflect the fact that the FSA has, in certain circumstances, deemed issuers to be eligible despite the presence of modifications in some or all of their audit reports, there will be new guidance on acceptable modifications to the opinion on the audited accounts. The requirement that at least 75% of the applicant's business be supported by a historic revenue earning record which covers the three year accounts period will be replaced by a requirement for the historical financial information to represent at least 75% of the new applicant's business for the full three year period and to permit prospective investors to make an informed assessment of what the future prospects of the applicant's business might be. There will be guidance as to what amounts to 75% of the applicant's business. There will be additional exemptions from the requirement to restate financial information, for example, where a class 1 acquisition is made, which will not result in the target's financial information being consolidated. The financial information table will be required to include a statement of the accounting policies used in its preparation. The new rules will amend the concession from the requirement for a full restatement of a target's annual consolidated accounts in certain circumstances where the target has securities listed on an overseas investment exchange. The amended concession will apply where the target has securities listed on an investment exchange that is not a regulated market or a MTF and the FSA is satisfied as to the appropriateness of this approach to the particular investment exchange or MTF. Transactions and class tests The new rules will clarify that where issuers wish to make adjustments to the figures used in calculating the class tests because they believe a class test result might be anomalous, they must discuss this with the FSA before the class tests crystallise. Despite the September 2011 changes to the Takeover Code following which break fees are generally prohibited in a takeover context, the FSA is proposing to clarify its approach as regards break fees. It will rename the concept a "break fee arrangement" and amend the definition, as well as the rules on the manner in which break fee arrangements should be calculated and/or aggregated. The new rules will introduce a 0.5% threshold (of the company's issued share capital) below which no announcement need be made of any issue, sale or cancellation of treasury shares under an employee share scheme. The definition of "associate" in the related party regime under the Listing Rules will be amended to include partnerships in which a related party holds a significant interest. The FSA gives the example of a 30% interest when referring to "significant interest". The FSA will include within the exemption from the related party transaction rules loans for the funding of defence and regulatory investigations, since they operate in similar way to an indemnity which is currently excluded. The FSA will delete the rule which states that a small reverse takeover meeting certain criteria can be treated as a class 1 transaction, since this exemption is rarely relied upon. The FSA will remove the references to "revenue nature" in the rules relating to significant transactions and related party 4

5 transactions so that transactions outside the ordinary course of the company's business will not be caught. This is in recognition of the fact that the accounting treatment no longer determines whether a transaction is within the ordinary course of business for a listed company and it can sometimes be difficult to distinguish some transactions as being capital or revenue in nature. Circulars The rules will be amended so that both the issuer and its directors (as opposed to just its directors) will be referred to as taking responsibility for the contents of a class 1 circular (reflecting the rules on responsibility for a prospectus). The list of documents required to be on display in relation to class 1 circulars will include any relevant sale and purchase agreement. The new rules will clarify that only information previously circulated to shareholders, or information filed with the FSA under a regulatory requirement, can be incorporated by reference into a circular. In response to queries received by the UKLA, the new rules will clarify that the UKLA will not normally vet "information-only" circulars (i.e. circulars which do not relate to a shareholder vote). Issuers will no longer be required to include class 1 disclosures within a related party circular in the event that a transaction has a percentage ratio greater than 25%. Companies with a standard listing In order to prevent use of the reverse takeover regime as a "back door" route to secure the premium listing of a company that would otherwise be ineligible for premium listing (and which previously satisfied the requirements only for a standard listing), the FSA is proposing to change the definition of a reverse takeover so that it will catch a premium listed company acquiring a standard listed company whereas currently this is not the case. Mineral / scientific research companies The new rules will state that if such a company has not been operating for three years, it must have published or filed accounts since the inception of its business activities. There will be a requirement for a scientific research company to have proved its ability to attract funds from sophisticated investors prior to the marketing at the listing date. In relation to a class 1 circular of a mineral company, there will be guidance to allow equivalent information to be produced in place of an expert's report (reflecting ESMA guidelines). Investment companies The FSA will clarify that the related party regime will catch any member of the investment manager's group. The new definition of "reverse takeover" will catch a takeover by an investment company of any other entity listed on the Official List (other than an investment company) where the percentage ratio under the class tests is over 100% or which would result in a fundamental change in the business or a change in board or voting control of the investment company. Externally managed companies 1 The new rules will require the management of the advisory firm to be responsible for any prospectus published by the listed 1 The FSA's proposals are aimed at preventing the corporate structure of "externally managed" companies becoming more widespread. This structure involves special purpose acquisition companies, or "SPACs" (cash shells incorporated with the intention of acquiring, running and transforming target businesses to create value) outsourcing significant management functions to an advisory firm, typically offshore. The FSA believes this structure could seriously undermine the ability of shareholders to hold the real management of such companies to account, as it places the advisory firm beyond many of the key controls contained in the listing regime. 5

6 company and subject to the requirements of the Disclosure and Transparency Rules in relation to the disclosure of share dealings in the company's shares. The new rules will prohibit companies featuring this structure from having a premium listing. General In relation to the definition of "shares in public hands", the FSA will clarify the treatment of: (i) shares held by different funds within a corporate group; and (ii) financial instruments giving long economic exposure to shares but not controlling the buy/sell decision in respect of the shares. To acknowledge the fact that there may be practical reasons why shares are not eligible for electronic settlement (for example, the securities of many overseas companies cannot be settled in the CREST system without the use of depositary interests), the FSA will require a company's constitution and the terms of its shares to be compatible with electronic settlement, rather than requiring shares to be settled electronically. Travers Smith LLP is a limited liability partnership registered in England and Wales under number OC and is regulated by the Solicitors Regulation Authority. The word "partner" is used to refer to a member of Travers Smith LLP. A list of the members of Travers Smith LLP is open to inspection at our registered office and principal place of business: 10 Snow Hill, London, EC1A 2AL. We are not authorised under the Financial Services and Markets Act 2000 but we are able, in certain circumstances, to offer a limited range of investment services because we are members of the Law Society of England and Wales and regulated by the Solicitors Regulation Authority. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. The information in this document is intended to be of a general nature and is not a substitute for detailed legal advice. 6