The London Stock Exchange has recently published further amendments to the Listing Rules. These are known collectively as Amendment 14. The amendments took effect on 10 January 2000, save for those relating to the content and timing of interim reports and preliminary statements of final results, which are described further below.
The role of UK Listing Authority is to be transferred from the Exchange to the Financial Services Authority; this is expected to take effect during Spring 2000 and will necessitate the publication of separate FSA Listing Rules, which will become the responsibility of the FSA, and rules governing the admission to trading on the Exchange, which will remain the responsibility of the Exchange. The FSA Listing Rules (which are available in draft form), however, will in essence replicate the current Listing Rules, as amended by Amendment 14.
This note highlights the changes which may be material to companies which are already listed in the context of their continuing compliance with the Listing Rules and also the changes which may be material to sponsors, companies which are seeking admission for the first time or those involved with companies which may come to the market, such as providers of equity finance.
MATERIAL CHANGES FOR LISTED COMPANIES
Electronic settlement
A new continuing obligation (and related new condition for listing) requires that all listed securities of a UK incorporated company must be eligible for electronic settlement (e.g. in CREST), save for certain debt securities and in exceptional circumstances where the Exchange so agrees.
Contents of documents
- Material contracts:
In determining what is material for these purposes, the Listing Rules now state specifically that regard must be had to the general duty of disclosure under the Financial Services Act 1986: namely as to whether the information is relevant to making an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the issuer and as to the rights attaching to the securities being issued.
In relation to the disclosure of material contracts in Class 1 circulars the test has been modified: the question is whether the contract is material to shareholders when deciding how to vote in relation to the transaction the subject of the circular concerned.
It is important to note that such contracts must also be put on display. The Exchange was exhorted during the consultation process on Amendment 14 to relax the criteria under which it will permit commercially-sensitive information to be removed from contracts on display. This notwithstanding, the Exchange has made no change to the rules and we can expect the Exchange to continue to be reluctant to allow parts of documents to be removed from public display.
(Contracts entered into in the ordinary course of business remain excluded from these requirements.)
- Indebtedness: The requirement for an indebtedness statement in Class 1 circulars and certain other documentation has, at long last, been removed. As explained below, however, the Exchange has published guidance which requires issuers to consider whether changes in indebtedness should be disclosed under the separate requirement for the disclosure of significant changes in the financial or trading position of the group since the last accounts.
- Shelf registration: The shelf registration regime introduced in January 1999 in respect of further issues of listed shares has been extended to further issues of debt securities.
Continuing obligations
- General obligation of disclosure:
The requirement, therefore, is now for disclosure of information, which is not public knowledge, concerning a change in financial condition, performance or expectation of performance which would be likely to lead to a substantial price movement.
- Content of announcements: A new requirement has been introduced that issuers must take all reasonable care to ensure that any information made available to the Company Announcements Office is not misleading, false or deceptive and does not omit anything likely to affect its import. Such a requirement has generally been regarded as implicit in the rules, particularly as it is substantially covered by the criminal offences relating to the making of misleading statements in section 47 of the Financial Services Act 1986. The Exchange, however, considered the introduction of an explicit rule helpful to assist it in taking action against companies which fail to comply.
The rule is not intended to create a new announcement obligation where one previously did not exist. It does not deal clearly with the position where the announcement includes material not prepared by the company itself but compiled from information published by others, but presumably companies are obliged to ensure that such material is not presented in a misleading manner.
- Sub-underwriting disclosure: In accordance with a recommendation of the Monopolies and Mergers Commission (now the Competition Commission) following their investigation into the supply of underwriting services for share issues, companies undertaking an underwritten share issue in which less than two thirds of the sub-underwriting is to be offered for tender must explain why such an approach has been taken in the relevant document and also in their notification of the results of the issue.
Related parties transactions
The Exchange has been concerned that the existing rules concerning related parties transactions both fail to catch persons who actually exercise influence over the listed company and also apply too widely, so as to catch transactions between the company and a director/shareholder of an insignificant subsidiary with no element of influence on the company. Consequently:
- the definition of a transaction with a related party has been extended to include a transaction between a company and 'any person who exercises significant influence over the company': the rules are unclear as to what is meant by 'significant influence' - the Exchange uses the example of joint ventures in its consultation document on Amendment 14, but does not address, for example, the position of banks or major clients whose orders may be significant to the company and who might therefore be considered capable of exerting significant influence;
- a new 'insignificant subsidiary' exemption has been introduced - this exempts from the related parties requirements directors/shareholders of subsidiary undertakings which have represented less than 10% of turnover and pre-tax profits and less than 10% of the assets of the listed company in each of the previous three years; and
- the existing exemption in respect of loan arrangements for, or on an unsecured basis by, a related party have been widened to exempt such arrangements made on normal commercial terms, whether or not in the ordinary course of business.
In addition, the obligation to produce a valuation in a circular relating to a related parties transaction in respect of the acquisition or disposal of an asset will now only apply to a related party transaction which is also a Class 1 transaction for the purposes of Chapter 10.
Financial information
A longstop date has been introduced for the publication of the preliminary statement of final results of 120 days from the end of the financial period to which they relate, and for the half yearly report of 90 days from the end of the period to which it relates.
Both the statement and the report must, as a minimum, contain a balance sheet, profit and loss account and cash flow statement. Where the figures in the half yearly report have been audited or reviewed in accordance with the relevant accounting guidance, there is a new requirement that the report of the auditors be included. These new rules apply for statements and reports published in respect of accounting periods beginning on or after 23 December 1999. They do not apply to overseas companies with a secondary listing in London.
Purchase of own securities
Chapter 15 has prohibited a company from purchasing its own securities at a time when a director would be prohibited from dealing under the Model Code. The Exchange has in the past interpreted this prohibition so as to apply equally to an early redemption of securities, although until now this has not been explicit on the face of the rules.
The revised and clarified prohibition on own share purchases and redemptions not only includes an exception for securities purchased or redeemed in accordance with their published terms of issue, but also where the purchase or redemption price or value would not be affected by the publication of the information which gives rise to the prohibition on dealing in the first place. A circular seeking shareholder authority for an own share purchase should, in addition to the existing requirements, include details of the outstanding levels of warrants and options to subscribe for securities.
Model Code
The Exchange has sought to clarify a number of provisions of the Model Code under which directors and relevant employees are prohibited from dealing. These changes include:
- the inclusion within the ambit of the Model Code of dealings in unlisted securities which are convertible into listed securities;
- allowing companies to make periodic 'formulaic' awards of options or shares under an employees' share scheme during a prohibited period where, subject to certain conditions and exceptions, failure to make the award would be likely to indicate the existence of price sensitive information;
- where directors are required to hold a certain number of shares in the company, allowing directors to acquire such qualification shares on joining the company during a prohibited period, where the director could not reasonably be expected to acquire them at another time;
- amalgamating into one rule the provisions relating to different types of saving schemes, which had previously consisted of different rules dealing with PEPs/ISAs/authorised unit trusts and saving schemes: this rule (in accordance with the recommendations of the Hampel Committee on Corporate Governance) also now permits payment of a director's remuneration in shares in certain circumstances (although, clearly, the company law, accounting, NI and PAYE issues would need to be considered on a case by case basis).
The removal of the 'bed and breakfast' dealings exemption from the Model Code, which had been proposed in the Exchange's consultation on Amendment 14 has not been put into effect.
In view of the requirement that companies should require compliance with a code of dealing in terms no less exacting than those of the Model Code, companies which have adopted their own code by reference to previous versions of the Model Code will need to ensure that they amend their code in line with the revised version of the Model Code.
Guidance notes
In accordance with its previously published intention of publishing guidance notes to explain the application of the Listing Rules in particular circumstances, the Exchange has published with Amendment 14 five new guidance notes in addition to the one which it published in 1999. These guidance notes do not form part of the Listing Rules, but they do constitute an important reference point for listed companies and their advisers in relation to their subject matter.
The new guidance notes include:
- Significant Change Statement and Indebtedness (see comments above in respect of the deletion of the requirement for an indebtedness statement in Class 1 circulars and certain other documents) - these notes explain the circumstances in which the Exchange might expect reference to be made to significant changes in indebtedness in the issuer's 'significant change statement'.
- The Model Code and Investment Entities - these notes set out the circumstances in respect of which an investment entity under Chapter 21 might be granted an exemption from the close period restrictions on dealing under the Model Code.
- Class 1 Disposals by Companies in Severe Financial Difficulty - these notes explain when the Exchange may grant a prior waiver of the Chapter 10 requirements to prepare a circular and obtain shareholder approval where a company in severe financial difficulty is undertaking a transaction in order that the company might secure an immediate working capital injection.
MATERIAL CHANGES FOR SPONSORS AND NEW APPLICANTS
Sponsor's responsibilities and financial information
The Listing Rules used to require that all financial information included in listing particulars and Class 1 circulars must be extracted from the accountants report, comparative table (or, in the case of a shelf document, the published annual accounts required by Chapter 12).
This caused a number of practical difficulties, such as, for example, conflicts with the SEC's requirement for a Management Discussion and Analysis, which would need to contain unaudited financial information. The requirement has therefore been deleted to allow issuers greater freedom to disclose historical financial information. However, sponsors are now required:
- to obtain written confirmation from the issuer that the financial information in the document has been properly `extracted' (not necessarily `derived') from the issuer's accounting records; and
- to be satisfied that this confirmation has been given after due and careful enquiry.
This is now recognised in the sponsor's Schedule 4A declaration to the Exchange. Sponsors will therefore need to amend the form of declaration which they use and ensure that the comfort letters which they customarily obtain from issuers and reporting accountants cover this new obligation.
The Exchange has indicated that they will continue to review the presentation of financial information to ensure that appropriate standards of presentation are maintained and, if necessary, they will issue further guidance.
As a separate but related matter, the new rules relating to innovative high growth companies (see below) impose new responsibilities on sponsors in respect of the reporting procedures relating to, and the presentation in listing particulars of, non financial operating data. These are also now reflected in the sponsor's Schedule 4A declaration to the Exchange. Again, sponsors should ensure they obtain appropriate comfort letters.
Sponsor's confirmation of independence
The Listing Rules require sponsors to submit to the Exchange for each transaction for which they act as sponsor a confirmation of independence. The form of this confirmation as set out in Schedule 1A has been amended, as have the related provisions of the Sponsors Eligibility Criteria.
Schedule 1A has been amended to clarify which "interests" must be disclosed and, more specifically:
- to require in the transaction documentation disclosure of interests in the issuer held in aggregate by those employees, directors or partners of the sponsor, who are directly involved in the sponsor's activities for the issuer (together with any other information as to interests disclosed, which the Exchange requires);
- to exclude from the disclosure obligations holdings in the issuer and its group by exempt fund managers and exempt market-makers;
- in respect of those disclosures dependant upon awareness, to clarify that it is the awareness of the sponsor or the compliance department which is relevant (note: the revised eligibility criteria indicate that it is information within the knowledge of the directors, partners or employees who are involved in the sponsoring activities of the sponsor and the sponsor's group compliance department - there is no need to contact all off shore companies in the sponsor's group);
- specifically to require notification, or a negative confirmation, of any matter referred to in the sponsor's eligibility criteria which may affect the sponsor's independence;
- to make it clear that, once a sponsor has submitted a Schedule 1A confirmation for a specific transaction, the Exchange will accept a written confirmation of "no material change" for the purposes of approving related transaction documentation.
Sponsors should also be aware of the changes to the Sponsors Eligibility Criteria, which do not form part of the Listing Rules, in respect of the question of independence. In particular, they should note:
- a proposed, contingent or existing fee arrangement with an issuer which is material to the sponsor or its group may result in the sponsor not being independent;
- a directorship, consultant or other agreement for the provision of services between any director, partner or employee of the sponsor or its group and the issuer or any member of the issuer's group may result in the sponsor not being independent;
- that the eligibility criteria now include a new, non exhaustive list of relationships and interests of directors, partners or employees of a sponsor which may compromise the independence of a sponsor and need to be considered before such person is permitted to take part in the sponsor's activities for the issuer in question.
Conditions for listing
A new condition of listing and a related new continuing obligation require that all listed securities of a UK incorporated company must be eligible for electronic settlement (e.g. in CREST), save for certain debt securities and in exceptional circumstances where the Exchange so agrees.
Listing particulars
- Cover:
- Memorandum and articles of association: The old provisions in Appendix 1 to Chapter 13 relating to the contents of articles of association (and in respect of which the issuer's solicitors used to be expected to give a compliance letter to the Exchange) have been removed, together with the requirement for a compliance letter, although: - certain of the old contents requirements have been retained as separate listing rules; and - whilst the old disclosure requirement in listing particulars was limited to a summary of the issuer's memorandum and articles of association regarding changes in capital and the rights attaching to its shares, the rules now also require a summary of the material provisions in those documents. There is no definition as to what constitutes a `material provision' in this regard - issuers will need to consider this carefully with their advisers and determine the extent to which disclosures will be necessary over and above the approach which has been adopted previously.
- Material contracts: In addition to the requirement to disclose details of material contracts entered into within the two preceding years, listing particulars must now also contain a summary of the principal contents of any other contract under which any member of the issuer's group has an obligation or entitlement which at the date of publication of the listing particulars remains material to the group.
In determining what is material for these purposes, the Listing Rules now state specifically that regard must be had to the general duty of disclosure under the Financial Services Act 1986: namely as to whether the information is relevant to making an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the issuer and as to the rights attaching to the securities being issued. In relation to the disclosure of material contracts in Class 1 circulars the test has been modified: the question is whether the contract is material to shareholders when deciding how to vote in relation to the transaction the subject of the circular concerned.
It is important to note that such contracts must also be put on display. The Exchange was exhorted during in the consultation process on Amendment 14 to relax the criteria under which it will permit commercially-sensitive information to be removed from contracts on display. This notwithstanding, the Exchange has made no change to the rules and we can expect the Exchange to continue to be reluctant in practice to allow parts of documents to be removed from public view. (Contracts entered into in the ordinary course of business remain excluded from these requirements, although (as before) disclosure of them may be appropriate in the light of the general duty of disclosure.)
- Indebtedness: The requirement for an indebtedness statement in listing particulars and certain other documentation has, at long last, been removed. As explained below, however, the Exchange has published guidance which requires issuers to consider whether changes in indebtedness should be disclosed under the separate requirement for the disclosure of significant changes in the financial or trading position of the group since the last accounts.
- Directors: Amendment 13 brought in a requirement for much greater disclosures in respect of director's past history (similar to the information required in the now redundant Schedule 7 Director's Declaration). Amendment 14 clarifies that where there are no relevant details about directors and senior management, a negative statement must be made.
- Shelf registration: The shelf registration regime introduced in January 1999 in respect of further issues of listed shares has been extended to further issues of debt securities.
Innovative High Growth Companies
A new chapter, Chapter 25, has been introduced with the intention of enabling innovative high growth companies without a three year trading record to seek a listing notwithstanding the listing condition that that the company's business is supported by its historic revenue earning record over at least the three year period for which financial information is generally required to be disclosed.
Amendment 13 in fact introduced an exception to the existing listing condition to allow the listing of companies without the three year record subject to the satisfaction of appropriate special conditions and additional disclosures. Chapter 25 sets out in more detail what is required in respect of innovative high growth companies, including that:
- their business is innovative in nature and can be expected to generate significant organic growth in revenues;
- a marketing of securities is undertaken in excess of £20m at the time of listing;
- the company has a market capitalisation of at least £50m at the time of listing;
- the directors and senior managers can demonstrate the necessary knowledge and experience for the development of the issuer's activities.
The Exchange reserves its rights to require the provision of market research, financial projections and other materials to enable it to assess, with its independent expert advisers, the eligibility of the applicant. In addition (as explained above) specific obligations are placed upon sponsors to obtain written confirmation:
- in respect of the establishment of procedures which provide a reasonable basis for the directors to make proper judgments as to the reporting of non financial operating data regarding the issuer's group; and
- where non financial operating data is included in listing particulars, as to its proper extraction from the issuer's records and to be satisfied (in both cases) that the confirmation has been given after due care and enquiry. Inevitably, this will result in further work for reporting accountants (or others sufficiently expert in the relevant field) with consequent impact on engagement letters and comfort letters addressed to the sponsor.
Certain specific requirements are made in respect of the contents of listing particulars (including a detailed explanation of the issuer's business plan and strategic objectives, an explanation of the risks associated with the business and, where the issuer's products/services are unproven, a requirement for an independent report underpinning the company's business strategy). Additional continuing obligations are imposed, including a requirement to report quarterly.
Guidance notes
In accordance with its previously published intention of publishing guidance notes to explain the application of the Listing Rules in particular circumstances, the Exchange has published with Amendment 14 five new guidance notes in addition to the one which it published in 1999. These guidance notes do not technically form part of the Listing Rules, but they do constitute an important reference point for listed companies and their advisers in relation to their subject matter. The new guidance notes relate to:
- Significant Change Statement and Indebtedness (see comments above in respect of the deletion of the requirement for an indebtedness statement in listing particulars and certain other documents) - these notes explain the circumstances in which the Exchange might expect reference to be made to significant changes in indebtedness in the issuer's `significant change statement'.
- The Model Code and Investment Entities - these notes set out the circumstances in respect of which an investment entity under Chapter 21 might be granted an exemption from the close period restrictions on dealing under the Model Code.
- Non Controlling Interest in a Merged Business - these notes explain the Exchange's approach to listing UK companies without the usual three year record and which hold a non controlling interest in a merged business (for example, a `dual headed' structure where the business of a UK primary listed company has been merged with that of a company listed in an overseas jurisdiction and the merged business is jointly managed and controlled by the two or more listed parent companies).
- Companies Undertaking Major Capital Projects - these notes explain the Exchange's approach to listing companies without the usual three year record and which are undertaking major capital projects.
- Class 1 Disposals by Companies in Severe Financial Difficulty - these notes explain when the Exchange may grant a prior waiver of the Chapter 10 requirements to prepare a circular and obtain shareholder approval where a company in severe financial difficulty is undertaking a transaction in order that the company might secure an immediate working capital injection.
Any reference in this note to listing particulars should be read as a reference to a prospectus in any circumstances where the law requires a prospectus to be published.
This note is not intended to be exhaustive nor to provide a full summary of the changes to the Listing Rules effected by Amendment 14. In particular, it is not aimed at, nor does it deal with a number of amendments relevant to specialist companies (such as mineral, scientific research based and overseas companies and investment entities). It also does not deal with amendments in respect of the disclosure of directors' details and changes to market opening hours which took effect as a result of published statements by the Exchange during 1999, and are now reflected in the printed text of the Listing Rules.
Furthermore this note is not intended to provide legal advice, or advice as to the application of the Listing Rules, in relation to any particular situation and it should not be acted or relied upon as such, without taking specific advice.
If you would like any further information or specific advice please contact your usual Macfarlanes' contact, Kevin Tuffnel or Tim Lewis.
