6)1) The Regulation of the UK Equity Capital Markets

Question 1

1.1.1 What are the two principal levels of entry into the equity market which the LSE operates?

Answer 1

1. The main market for those securities on the Official list and the SME growth Market, AIM
2. together with a specialist market: the professional securities market

Note that FCA regulates listed companies (on the main market or professional securities market), LSE regulates those quoted on AIM

Question 2

1.1.1 What are the MiFID II requirements for issuers to the SME-GM?

Answer 2

Requires at least 50% of the issuers whose financial instruments are admitted to trading on an MTF registered as an SME-GM are SMEs at the time the MTF is registered as an SME-GM, and in any calendar year thereafter

Question 3

1.1.2 What sourcebooks are the rules applying to companies on the Official List split into? (3)

Answer 3

1 The Listing Rules (LRs) comprise general rules for listed companies, including the provisions for listing, overarching listing principles and continuing obligations
2. The Disclosure Guidance and Transparency Rules (DTRs) provide rules and guidance for the dissemination of price-sensitive, and other, information, notifications of interests in shares, and which corporate governance provisions apply
3. The Prospectus Regulation Rules (PRR) consolidate all rules on prospectuses, including the content and form of prospectuses, the procedures for their approval, and exemptions from the requirement for a prospectus. Certain requirements, such as those listing the required contents of prospectuses, are directly reproduced from the Prospectus Regulation

Question 4

1.1.2 The 3 sourcebooks apply to premium listed companies, but who else do they each separately apply to?

Answer 4

LRs apply widely to issuers with a premium listing, but only certain elements apply to issuers with a standard listing and specialist issuers

DTRs apply in general to listed companies, with certain elements also applying to AIM and Aquis Growth Market quoted companies; several elements that were previously within the DTRs now sit within MAR

PRRs apply to all companies, both public and private, seeking to offer shares to the public or gain admission to trading on a UK-regulated market

Question 5

1.1.3 What is a premium listing?

Answer 5

For issuers prepared to meet UK super-equivalent standards. Applicable to equities issued by commercial companies, together with those equity securities issued by close-ended investment companies (CEICs), OEICs and sovereign-controlled commercial companies

Question 6

1.1.3 What is a standard listing?

Answer 6

Requires issuers to comply with standards originally based on minimum EU directive standards. It is available for both UK and overseas commercial equity issuers, as well as issuers of GDRs, debt, securitised derivatives, and miscellaneous securities. It is not available for CEICs or OEICs

Question 7

1.1.4 What are the Listing Rules?

Answer 7

Set out the standards expected of listed issuers, and specific procedures to be followed:
- the details of the FCA’s enforcement regime
- the reqs for listing for all securities, together with the super-equivalent provisions for premium listing
- the listing principles
- the procedures for applying for admission to listing, including secondary offerings
- the reqs for sponsors, including criteria for approval, when required, and obligations
- certain continuing obligations for companies and directors, including corporate gov reqs
- the reqs for shareholder approval of significant and related party txns
- the contents of circulars to shareholders, and financial information in circulars
- the reqs for share buy-backs
the specific reqs for CEICs, OEICs, and issuers of debt, GDRs, and other non-equity securities

Question 8

1.1.5 What are the Disclosure Guidance and Transparency Rules?

Answer 8

To implement the reqs of UK MAR, and the transparency directive that applies to quoted companies in the UK, with a view to ensuring transparency for shareholders. In particular, they contain:
- provisions relating to the disclosure and control of inside info by issuers
- reqs to disclose txns by persons discharging managerial responsibilities (PDMRs) and their related parties
- periodic financial reporting, including the timing and content of annual and interim accounts, and interim management statements
- vote-holder and issuer notifications (disclosure of substantial shareholdings)
- continuing obligations and access to info
- corp gov reqs, including the req for an audit committee and corp gov statements

Question 9

1.2 How must entities that offer multilateral trading for financial instruments (such as an order book) be organised?

Answer 9

Either as a regulated market or an MTF, slightly different standards applying to each, under MiFID II

Question 10

1.2 What is a regulated market, an MTF and an RIE?

Answer 10

Regulated markets are those which comply with the requirements for regulated markets under MiFID II

MTFs are those markets which are not designated as regulated markets, but must comply with the MiFID II reqs

an RIE is a firm which operates one or more of these markets and meets the standards required by the FCA to be an RIE

Question 11

1.2.1 What is the FCA glossary definition of a regulated market?

FCA must maintain a list of regulated markets for which they are responsible

Answer 11

• A regulated market which is an RIE
• a market situated outside the UK which is characterised by the fact that:
  
  • it meets comparable reqs to those set out for UK RIEs
  • the financial instruments dealt in are of a quality comparable to those in a regulated market in the UK

Question 12

1.2.1 What are the regulated markets?

Answer 12

1. The LSE
2. ICE Futures Europe (ICE)
3. London Metal Exchange (LME)
4. Aquis Exchange (formerly NEX)
5. CBOE Europe Equities Regulated Market (CBOE)
6. International Property Securities Exchange (IPSX)

Question 13

1.2.2 What is an RIE?

Answer 13

An investment exchange which is considered by the FCA to be fit and proper to act as such and which, although it is subject to FCA supervision and oversight, is not required to be authed

Question 14

1.3.1 What are the Listing Rules (applying to both standard and premium listed companies)?

Answer 14

Listing Principle 1: A listed company must take reasonable steps to establish and maintain adequate procedures, systems and control to enable it to comply with its obligations

Listing Principle 2: A listed company must deal with the FCA in an open and cooperative manner

Question 15

1.3.1 What are the Premium Listing Rules?

Answer 15

Premium Listing Principle 1: A listed company must take reasonable steps to enable its directors to understand their responsibilities and obligations as directors

2: A listed company must act with integrity towards the holders and potential holders of its premium listed shares

3: All equity shares in a class that has been admitted to the premium listing must carry an equal number of votes on any shareholder vote. In respect of certificates representing shares that have been admitted to a premium listing, all the equity shares of the class which the certificates represent must carry an equal number of votes on any shareholder vote

4: Where a listed company has more than one class of equity shares admitted to a premium listing, the aggregate voting rights of the shares in each class should be broadly proportionate to the relative interests of those classes in the equity of the listed company

5: A listed company must ensure that it treats all holders of the same class of its premium listed securities and its listed equity shares that are in the same position equally in respect of the rights attaching to those premium listed securities and listed equity shares

6: A listed company must communicate information to holders and potential holders of its premium listed securities and its listed equity shares in such a way as to avoid the creation of a false market in those shares and securities

Question 16

1.3.2 What should the procedures, systems and controls of listed companies ensure?

Answer 16

• they can properly identify obligations concerning significant txns and related party txns, and the timely and accurate disclosure of info to the market
• they can properly identify info which requires disclosure under the Listing Rules, disclosure reqs, Transparency Rules or corp governance rules in a timely manner
• any info identified above is properly considered by the directors, and such a consideration encompasses whether the info should be disclosed

Question 17

1.3.3 What is the High Growth Segment of the Main Market?

Answer 17

Designed to assist mid-sized UK and EU companies that require access to capital and a public platform to continue their growth
Has a ‘UK regulated market’ status; the ‘DTR’ rules apply but the listing rules do not
For high growth business that cannot meet reqs to be on FCA’s Official List

Question 18

1.3.3 Who can access the HGS?

Answer 18

For equity shares of UK and EU trading businesses that can demonstrate significant growth in revenues and a longer term aspiration to join the premium segment of the Main Market

Specific criteria include:
- incorporation in the UK or an EEA state
- equity shares only
- revenue-generating business, with historic rev growth of 20% compound annual growth rate (CAGR) over a three-year period
- min free float of 10%, with a value of at least £30mill (majority must be raised at admission)
- min £300 mill market capitalisation upon admission
- a key adviser (on LSE approved list and the FCA list of sponsors) to be retained at admission and for specific matters, including notable txns
- set out intention to join Main Market in the future

Question 19

1.3.3 What is the regulatory status of HGS?

Answer 19

Has EU-regulated market status
Outside the UK’s listing regime - means companies are subject to LSE’s HGS Rulebook and existing Admission and Disclosure Standards
Regulated market under EU FSAP - Prospectus Directive, Transparency Directive and Market Abuse Directive apply

Question 20

What must a company transitioning from the HGS to premium listing need to transition to premium listing on the Official List?

Answer 20

Need to apply in accordance with Listing Rule 3
Meet the eligibility reqs for premium listed companies in the Listing Rules
An eligibility letter from a sponsor (setting out how the company satisfies Listing Rule 2 and Rule 6) would be required
A new prospectus may or may not be required, depending on circumstances of the company

Question 21

1.3.3 What are the reqs to be admitted to the HGS?

Answer 21

Companies must:
- produce a prospectus, approved by the FCA
- appoint a key adviser, similar role to a listing sponsor, in relation to admission
- demonstrate eligibility for the segment, as set out under the HGS Rulebook, and compliance with the LSE’s HGS Rulebook and the Admission and Disclosure Standards
- be approved for admission by LSE’s Admissions Review Committee
- satisfy on-going reqs as set out in the HGS Rulebook, inc:
- rules around significant txns and website disclosure
- reqs to consult a key adviser for specific events, such as notifiable txns
- comply with EU FSAP directives as applicable to regulated markets, inc the transparency directive
- an annual statement of what corp gov code has been adopted and to what extent

Question 22

1.3.4 What is the Specialist Fund Segment?

Answer 22

New segment of the Main Market
Designed for closed-ended investment funds
Replaces previous Specialist Fund Market
Securities admitted to the SFS are not admitted to the Official List
UK-regulated market
Securities admitted are eligible for most investor mandates providing a pool of liquidity for issuers admitted to the market
- they sit outside the UK’s Listing Regime, however

Question 23

1.3.4 Who is the SFS for?

Answer 23

Specialised investment entities that wish to target institutional and high net worth professionally advised investors rather than retail investors.
UK and non-UK domiciled investment entities are eligible to seek admission to the SFS
Trading companies do not qualify
Aimed at a variety of different types of investment managers, including those managing large hedge funds, PE funds, and certain emerging market and specialist property funds, seeking admission to a public market in London

Question 24

1.3.4 What is the two-stage process to allow admission to trading on the SFS?

Answer 24

• the approval of a prospectus by the Primary Markets division of the FCA (formerly known as the UKLA)
• following approval of the prospectus, and application to the LSE for admission to trading on the SFS

Question 25

1.3.4 How can a business be eligible for admission to trading on SFS?

Answer 25

They must ensure that:
- the prospectus they are submitting complies with Annexes 4 and 11 of the Prospectus Regulation Rules sourcebook
- they disclose post-issue free float as part of their submission to the LSE
- they comply with the LSE Admission and Disclosure Standards

Question 26

1.4 What are the Listing Requirements for all securities? (11)

Answer 26

• Applicants must be duly incorporated in accordance with the law of their place of incorporation, and operate in accordance with their constitution
• Securities must be duly authed, conform with the law of the country of incorporation, and have any necessary statutory or other consents
• Where any securities of a particular class are admitted to the listing, all the existing securities, and further issues of securities of that class, must be admitted to the listing
• Securities must be admitted to trading on a regulated market for listed securities
• Securities must be freely transferable
• Shares must be fully paid up and free from liens and any other restrictions on the right of transfer
• The expected market value of all securities issed by the company, and to be listed, must be at least £30mill for shares and £200k for debt securities (there can be exceptions for this where the amount is not fixed, and also where securities of the same class are already listed)
• The expected market value of shares of a closed-ended investment fund or an open-ended investment fund to be listed must be £700k
• A prospectus for the sale or admission to the listing of the securities must be approved by the FCA and published in accordance with the prospectus rules
• Convertible securities may be admitted to listing only if the securities into which they are convertible are already, or will become at the time, listed securities or securities listed on a regulated, regularly operating, recognised open market
• At least 10% of the shares must be distributed to the public, i.e., not held by directors or significant shareholders (5%+). This is referred to as ‘shares in public hands’, or colloquially as ‘free float’ (this ensures there is sufficient liquidity in the shares)

Question 27

1.4 What are the additional Listing Requirements for premium issuers (commercial companies; investment companies, mineral companies and scientific research companies are subject to variations in these rules)? (3)

Answer 27

• The issuer must have published consolidated, independently audited accounts covering at least 3 years, with the latest accounts being no more than 6 months old at the date of its prospectus
• At least 75% of the applicant’s business must be supported by this three-year earning record, and it must carry on an independent business as its main activity and have controlled the majority of its assets for at least 3 years
• The issuer must make a clean working capital statement, i.e., show that it has sufficient working capital for the next 12 months

Question 28

1.5.1 Which disclosures does Chapter 9 of the LRs state an issuer must make? (3)

Answer 28

• New issues or redemptions or securities
• Corporate Actions (i.e. Dividends, rights issues or bonus issues)
• Changes to the company’s name, registered office or directors

Question 29

1.5.1 What is the central requirement set out in DTR 2.2 and UK MAR (Article 17 (1) - public disclosure of inside information)?

Answer 29

Premium or standard issuer must make a public disclosure, through a Regulatory Information Service (RIS), of any inside information which directly concerns it, and that this disclosure should be made ASAP

Question 30

1.5.2 What are the 3 new criminal offences introduced by Section 95 of the FSA 2012?

Answer 30

• making false or misleading statements (Section 89)
• creating false or misleading impressions (Section 90)
• making false or misleading statements or creating false or misleading impressions in relation to specified benchmarks (Section 91)

Question 31

1.5.2 What is inside information? (4)

Answer 31

Information:
- of a precise nature
- which has not been made public
- relating, directly or indirectly, to one or more issuers, or to one or more financial instruments, and which,
- if it were made public, it would be likely to have a significant effect on the prices of those financial instruments, or on the price of related derivative financial instruments

Question 32

1.5.2 What are some examples of inside info which could require disclosure? (4)

Disclosures to be made without delay unless provisions below apply

Answer 32

• changes in expectations of the company’s profits, including major new contracts or losses
• material transactions, including acquisitions, disposals or joint ventures
• appointment or resignation of senior management
• changes to the financial stability of the company, such as the withdrawal of lending facilities

Question 33

1.5.3 When may issuers delay the public disclosure of inside information so as not to prejudice its legitimate interests?

Answer 33

Providing that:
- such omission will not be likely to mislead the public
- any person receiving the information owes the issuer a duty of confidentiality, regardless of whether such duty is based on law, regulations, articles of association or contract
- the issuer is able to ensure the confidentiality of that information

Question 34

1.5.4 Who may an issuer disclose inside information to, providing they are validly involved in the matter which is the subject? (9)

Issuers must draw up a list of those who have access to the inside info.

Answer 34

• Employees of the issuer
• Advisers, and the advisers of any other party to the negotiations
• major shareholders
• bankers
• counterparties in negotiations
• potential underwriters
• employee reps or trade unions
• govt, statutory or regulatory authorities
• credit rating agencies

Question 35

1.5.6 What information must an insider list contain? (4)

Answer 35

• the identity of each person having access to inside info (third parties must also keep their own lists)
• the reason why such persons are on the insider list
• the date and time at which that person obtained access to inside info
• the date on which the insider list was created and updated

Question 36

1.5.6 When must an insider list be promptly updated? (3)

Answer 36

• when there is a change in the reason why a person is already on the list
• when any person who is not already on the list is provided with access to inside info
• to indicate the date on which a person already on the list no longer has access to inside info

Question 37

1.5.6 How long must insider lists be kept from the date on which it is drawn up or updated, whichever is latest?

Answer 37

at least 5 years

Question 38

1.5.7 What Price Stabilisation measures might investment banks use after the IPO of a company, to increase investor and issuer confidence? (2)

Must be watched as may be considered market abuse

Answer 38

• buying relevant securities from the secondary markets
• issuing new shares into the market to suppress price peaks

Question 39

1.5.7 Who do the price stabilising rules not apply to? (4)

Answer 39

• non-authed persons
• must not apply to txns, orders, behaviour, actions or omissions to which the MAR applies
• Price support activities carried out in accordance with the timing, disclosure and procedures of these rules
• Behaviour which conforms with Article 5 of UK MAR will not amount to market abuse and are detailed in the relevant technical standards of the FCA

Question 40

1.5.7 What are the conditions for a buy-back clause, Article 5 (1) of UK MAR? (4)

Answer 40

• the full details of the programme must be disclosed prior to the start of trading
• trades are reported as being part of the buy-back programme to the competent authority (ie, FCA) of the trading venue and disclosed to the public
• adequate limits with regard to price and volume are complied with
• they comply with the relevant technical standards

Question 41

1.5.7 What are the conditions for the exemption in Article 5 of UK MAR to apply to a buy-back? (3)

Answer 41

• reduce capital of an issuer
• meet obligations of debt instruments that are exchangeable into equity instruments
• meet obligations of share option programmes, or other allocations of shares, to employees or to members of the admin, management or supervisory bodies of the issuer or of an associate company

Question 42

1.5.7 What are the conditions for stabilisation in Article 5(4) of UK MAR? (4)

Answer 42

• stabilisation is carried out for a limited period
• relevant info about the stabilisation is disclosed and notified to the competent authority of the trading venue
• as with buy-backs, adequate limits with regard to price are complied with
• they comply with relevant technical standards

Question 43

1.5.7 What other factors must stabilisations and buy-backs comply with? (4)

Answer 43

Relevant regulatory technical standards detailed in the Handbook, relating to:
- conditions for trading
- restrictions regarding time and volume
- disclosure and reporting obligations
- price conditions

Question 44

1.5.7 How long can a stabilisation period last? (2)

Answer 44

Not more than 30 calendar days after:
- commencement of trading in an IPO
- the date of allotment (for secondary offers)

Question 45

1.6 Under Rule 8.2 of the LRs, when must a premium issuer appoint a sponsor to advise it? (4)

Answer 45

• makes an application for admission of equity shares which requires production of a prospectus
• required to produce a Class 1 circular, a circular in relation to a reconstruction or refinancing, or a circular for a share buy-back, including a working capital statement (tells the obligations according to the LRs and DTRs)
• applies to transfer its listing category from standard to premium
• FCA requires because it appears to the FCA that there is, or may be, a breach of the LRs or DTRs

Question 46

1.6.2 What are the duties/principles for sponsors? (6)

Companies can appoint multiple sponsors and they will all have to comply with these regulations

Answer 46

• must, in relation to a sponsor service, act with due care and skill
• where providing guidance, must be satisfied the directors of the listed company understand their responsibilities
• open and cooperative with the FCA, in a timely manner
• disclose concerns about non-compliance with DTRs and LRs to FCA in a timely manner (either for the sponsor or issuer)
• take reasonable steps to identify a conflict of interest that could adversely affect its ability to perform its function properly in accordance with its role as a sponsor
• effective org and admin arrangements that ensure conflicts of interest do not adversely affect its ability to perform its function properly in accordance with its role as a sponsor. If the sponsor is not reasonably satisfied that its arrangements will ensure that a conflict of interest will not adversely affect its ability to perform its functions properly, then it must decline to provide sponsor services on the txn

Question 47

1.6.4 In relation to an initial offering, when can a sponsor submit to the FCA an application for admission to listing on behalf of an applicant? (5)

Sponsor must complete a sponsor’s declaration to confirm, at the time of an application for listing, as well as a shareholder statement or pricing statement. These must be submitted to the FCA on the day the FCA is to consider the application for approval of the prospectus

Answer 47

When it has become reasonable opinion, after having made due and careful enquiry, that the:
- applicant satisfied all reqs of LRs relevant to application for admission to listing
- applicant has satisfied all applicable reqs set out in the prospectus rules
- directors of applicant establish procedures enabling applicant to comply with LRs and DTRs on an ongoing basis
- directors establish procedures to provide proper judgements, on an ongoing basis, as to the financial position and prospects of the applicant and its group
- directors of the applicant have a reasonable basis on which to make the working capital statement required

Question 48

1.6.5 What is a Class 1 circular?

Answer 48

A notice of a general meeting sent to shareholders of a premium listed company, seeking their approval of the company’s proposed txn

Question 49

1.6.5 When can a sponsor submit an application of approval of a circular to the FCA? (3)

Answer 49

• applicant has satisfied all reqs of the LRs relevant to the production of the circular
• the txn will not have an adverse impact on the issuer’s ability to comply with LRs or the DTRs
• the directors of the applicant have a reasonable basis on which to make the working capital statement required

Question 50

1.7 What are the 5 main methods for an applicant to IPO?

Answer 50

• an offer for sale
• an offer for subscription
• an intermediaries offer
• a placing
• an introduction

Question 51

1.7 What is an Offer for Sale? (4)

Answer 51

• company offers shares for sale to institutional investors and the retail public
• shares may be
  -involved in a new issue of shares by the company
  -on-sale in the IPO
  
  • being sold by the company’s existing shareholders seeking realisation on investment
• offer co-ordinated by the company’s investment bank
• usually underwriters (usually investment banks) will agree to acquire any unsold shares at the full offer price
  
  • increases costs
  • reduces risk of volatile market conditions

Question 52

1.7 What is an offer for Subscription? (5)

Answer 52

• involves the company issuing new shares in response to applications for shares
• different to offer for sale because the shares themselves are not physically in existence until applications have been received from investors, who become subs for shares
• commonly used for fundraising by investment companies
• tax benefits for investors in unlisted companies (inc. AIM and Aquis Exchange Growth Market companies)
• offers for sub are likely to be underwritten

Question 53

1.7 What is an intermediary offer? (2)

Answer 53

• Similar to an offer for sub except an intermediary (i.e. a bank or stockbroker) acts as a conduit to gather investors from among its clients
• Offers may or may not be underwritten

Question 54

1.7 What is a placing? (6)

Answer 54

• Quickest, cheapest and most certain route open to a company to raise new funds
• Company arranges for its investment bank to place blocks of new or existing securities with the bank’s investor client base and other institutional contacts
• Sometimes referred to as selective marketing, as new securities are not offered to the wider community of institutional investors
• Reduces the cost and time required for marketing the issue, may avoid underwriting costs
• May be used in either a primary or secondary offering
• May be used as a standalone route to an IPO or alongside an offer for sale, sub and/or an intermediary offer to widen the number of potential investors

Question 55

1.7 What is an introduction? (2)

Answer 55

• Does not involve a new issue of shares
  
  • shares which are already widely held are admitted to listing
• Only available to an issuer when shares are already of such an amount and are so widely held that their marketability can be assured once they are listed
  
  • i.e. may be used by a well known overseas listing seeking a secondary listing in the UK, or a company on AIM seeking to move into the main market

Question 56

1.7.2 How might a secondary issuer seek to raise additional equity capital? (4)

Commonly referred to as a secondary offering - pre-emption rights should be taken into account for these offerings

Answer 56

• a rights issue
• a secondary placing
• an open offer
• a vendor consideration placing

Question 57

1.7.2 What is a rights issue? (4)

Answer 57

• A txn where a company offers all existing shareholders the opportunity to buy further shares in that company in accordance with the pre-emption rights
• Shares are offered pro rata to their existing holding, at a discount to the existing market price
• in the example of a 1 for 5 rights issue, shareholders are offered 1 new share or every 5 they currently own
  
  • they may accept, reject, or sell their allotment letter to third parties at a price reflecting the level of discount
• in most cases, companies enter into underwriting agreements with investment banks to guarantee they receive the money they need from a rights issue
  
  • a low share offer price may mean this is unnecessary

Question 58

1.7.2 What is a secondary placing?

Answer 58

• Non-pre-emptive issue, as shares are offered to new, incoming shareholders

Question 59

1.7.2 What is an open offer? (6)

Answer 59

• Pre-emptive offer to existing shareholders to sub or purchase further shares in proportion to their existing shareholdings
• Does not give shareholders a rights to sell their entitlement to new shares
• Max price discount permissible (for listed companies) is 10%
• Less attractive to shareholders and may have a lower chance of being successful
• Common to combine an open offer with a placing, designed in effect to underwrite the open offer by ensuring that the company has also identified institutional investors who are committed to taking up any unsold shares
• Open offer has slightly shorter timescale, and is a quicker method of raising money than a rights issue

Question 60

1.7.2 What is a vendor consideration placing?

Answer 60

• Way of raising a relatively small sum to finance an acquisition
• Issue of new shares to the vendor of the acquisition target as consideration for the acquisition, with a pre-arranged placing of these consideration shares in order to convert them into cash for the vendor

Question 61

1.8 Under DTR chapter 5, a person must notify an issuer when the percentage of its voting rights reaches certain thresholds. What are these thresholds?

These apply to any financial instrument held by a natural person or legal entity fulfilling orders received from clients, responding to a client’s request to trade otherwise than on a proprietary basis, or hedging positions arising out of such dealings

Answer 61

• If the issuer is listed and incorporated in the UK, disclosure is needed if the percentage reaches, exceeds or falls below 3% and each 1% thereafter up to 100%
• In respect of a non-UK issuer, the thresholds requiring disclosure are 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%. These thresholds also apply to a UK issuer if the shareholder is a regulated discretionary investment manager or a regulated CIS

Question 62

1.8 Which exceptions apply to the disclosure rules? (5)

Answer 62

• Shares held by a custodian (or nominee) in its capacity, whether operating from an establishment in the UK or elsewhere, providing that such a person can only exercise voting rights attached to such shares under instructions given in writing or by electronic means by the ultimate underling beneficial owners
• Shares held by an authorised market maker acting only in that capacity, if the threshold for disclosure is 10% and each percentage point thereafter
• Shares held by a credit institution or investment firm providing that they are held within the trading book, and that they do not use the voting rights to intervene in the management of the underlying company; here the threshold for disclosure is 5% and each percentage point thereafter
• Shares held by a ‘collateral taker’ under a collateral txn which involves the outright transfer of securities providing that the collateral taker does not declare any intention of exercising (and does not exercise) the voting rights attached to such shares
• Shares acquired for stabilisation purposes in accordance with the buy-back and stabilisation regulation, if the voting rights attached to those shares are not exercised or otherwise used to intervene in the management of the issue

Question 63

1.8.2 When is a person an indirect holder of shares for the purpose of the applicable definition of shareholder to the extent that they are entitled to acquire, dispose of, or exercise voting rights? (8)

Answer 63

In any of the following cases or a combination of:
- Voting rights held by a third party with whom that person has concluded an agreement, which obliges them to adopt, by concerted exercise of the voting rights they hold, a lasting common policy towards the management of the issuer in question
- Voting rights held by a third party under an agreement concluded with that person providing for the temp transfer for consideration of the voting rights in question
- Voting rights attaching to shares which are lodged as collateral with that person providing that person control the voting rights and declares their intention of exercising them
- Voting rights attaching to shares in which that person has a life interest
- Voting rights which are held, or may be exercised, within the meaning (a) to (d), in cases (f) and (h), by a person undertaking investment management, or by a management company, or by an undertaking controlled by that person
- Voting rights attaching to shares deposited with that person, which the person can exercise at their discretion in the absence of specific instructions from the shareholders
- Voting rights held by a third party in their own name on behalf of that person
- Voting rights which that person may exercise as a proxy when that person can exercise the voting rights at their discretion in the absence of specific instructions from the shareholders

Question 64

1.8.3 Under DTR Chapter 5, which financial instrument qualify for the rules for disclosure? (2)

Answer 64

• Transferable securities (including shares)
• options, futures, swaps, CFDs and any other derivative contract, providing:
  
  • they provide an entitlement to acquire, on the holder’s own initiative alone, under a formal agreement, shares of the issuer which are already issued and to which voting rights are attached
  • the instrument holder will enjoy, on maturity, either the unconditional right or the discretion to acquire the underlying shares, under a formal, legally binding agreement

Question 65

1.8.4 What information must an issuer disclose by an RIS at the end of each calendar month during which it has increased or decreased its share capital? (2)

This is so that vote-holders can establish their percentage holding

Answer 65

• the total amount of voting rights and capital in respect of each class of share which it issues
• the total number of voting rights attaching to the issuer’s shares which are held in treasury

Question 66

1.8.4 When there is an increase or decrease in total voting rights of 1% or more, when must an issuer announce this?

Answer 66

Immediately and no later than the close of business on the business day following the change of the total number of voting rights

Question 67

1.8.5 What are the requirements of a notification of combined holdings under DTR 5.7? (4)

Answer 67

They must reference each of the following:
- the aggregate of all voting rights which the person holds as a shareholder and as the direct or indirect holder of qualifying financial instruments and financial instruments with similar economic effects
- the aggregate of all voting rights held as a direct or indirect shareholder (disregarding for this purpose the holdings of financial instruments)
- the aggregate of all voting rights held as a result of direct and indirect holdings of qualifying financial instruments
- the aggregate of all voting rights deemed to be held as a result of direct and indirect holdings of financial instruments having similar economic effects to (but not including) qualifying financial instruments

Question 68

1.8.6 Under DTR 5.8, when must the disclosure of major holdings be made to the issuer of the underlying shares?

As of 2021, these notifications must be made via the major shareholdings notification portal via the FCA’s Electronic Submission System (ESS)

Answer 68

ASAP, no later than two trading days after the vote-holder becomes aware of their holding (four trading days for holders in non-UK issuers)

Question 69

1.8.6 What must a notification to the FCA’s ESS for major shareholdings include? (4)

Answer 69

• The resulting situation in terms of voting rights
• The chain of controlled undertakings through which voting rights are effectively held, if applicable
• the date on which the threshold was reached or crossed
• the identity of the shareholder, even if that shareholder is not entitled to exercise voting rights under certain specific conditions, and of the person entitled to exercise voting rights on behalf of that shareholder

Question 70

1.8.6 What must a notification of voting rights arising from the holding of financial instruments include? (7)

Answer 70

• the resulting situation in terms of voting rights
• The chain of controlled undertakings through which voting rights are effectively held, if applicable
• the date on which the threshold was reached or crossed
• for instruments with an exercise period, an indication of the date or time period in which shares will, or can be acquired, if applicable
• the date of maturity or expiration of the instrument
• the identity of the holder
• the name of the underlying issuer

Question 71

1.9 What are the four ‘class tests’ used to determine the size of the asset or business being acquired or disposed in relation to the size of the listed company?

The highest percentage calculated from these tests will determine the class of the txn and the action required by the listed company

Answer 71

• Gross assets test
  
  • gross assets of the txn target/gross assets of the listed company
  • gross assets are the total current assets + total non-current assets
• Profits test
  
  • attributable profits of the txn target/profits of the listed company
  • profits are defined as the profits after all deductions excluding tax
• Consideration test
  
  • total consideration paid or received for the target/market capitalisation of the listed company on the last business day before the announcement of the txn
• Gross capital test
  
  • gross capital of the txn target/gross capital of the listed company

Question 72

1.9 What is a residual txn?

Answer 72

• all percentage ratios are < 5%
• no req to disclose the txn to the market unless:
  
  • new shares are to be issued in connection with the txn
  • a regulatory announcement is required for other reasons, such as UK MAR

Question 73

1.9 What is a Class 2 txn?

Answer 73

• any percentage ratio is >= 5%
• each is < 25%
• listed company must disclose txn to the market, as soon as it is agreed, with full details

Question 74

1.9 What is a Class 1 txn?

Sponsor must be appointed for Class 1 or reverse takeover

Answer 74

• any percentage ratio is >= 25%
• req shareholder approval through the passing of an ordinary resolution at a GM
• notice of the GM must be contained in a circular to shareholders, and approved by the FCA

Question 75

1.9 What is a reverse takeover?

Sponsor must be appointed for Class 1 or reverse takeover

Answer 75

• acquisition by a listed company of a business, an unlisted company or assets in which any percentage ratio is >= 100%
• or which would result in a fundamental change in the business
• or in a change in the board or voting control of the listed company
• requires shareholder approval
• given size of the txn, it is likely to involve issue of new shares.
• FCA generally treats this as a new listing, thus requiring a prospectus

Question 76

1.10 How did the FCA say the UK public markets could become more attractive and trusted?

From their consultation paper in May 2023

Answer 76

Rules should provide more flexibility and investors must be willing to take on greater investment risk, holding companies to account

Question 77

1.10 What are the key changes proposed by CP 23/10? (8)

Answer 77

• removal of eligibility rules requiring a three-year financial and revenue-earning track record as a condition for listing, and no longer requiring a ‘clean’ working capital statement
• modified and simplified eligibility and ongoing rules requiring that a company has an independent business and has operational control over its main activities, to create a more permissive approach to accommodate a range of business models and corporate structures
• modified rules requiring listed companies to conclude a shareholder agreement with a controlling shareholder to ensure flexibility by moving to a comply or explain and disclosure-based approach, again to create a more permissive approach for a wider range of business models and corporate structures
• a more permissive approach to dual class share structures (DCSSs)
• the removal of compulsory shareholder votes and shareholder circulars for significant txns
• the removal of compulsory shareholder votes and shareholder circulars for related party txns (RPTs), including where a controlling shareholder is involved and a controlling shareholder agreement is not in place
• the potential merger of the rules for Sovereign Controlled Commercial Companies into the single category for equity shares, subject to modifications if required
• A single set of Listing Principles and related provisions

Question 78

1.10 What are the two tranches the FCA has proposed for the draft of the UKLR instrument?

Replacing LRs

Answer 78

• First tranche contained with this consultation paper - focusing on the ‘UKLR’ underpinning new commercial companies category
• Second tranche for other categories and remaining provisions impacting all issuers, providing the full draft UKLR, to be published in Q1 2024

Question 79

1.10 How did the FCA propose to change the LRs? (11)

Answer 79

• single segment for equity shares in commercial companies, separate categories of listing remaining for other types of securities and shares in investment vehicles and special purpose acquisition companies (SPACs)
• a ‘transition’ listing category for existing standard listed issuers which are unable or unwilling to move to the single segment
  
  • based on current rules for standard listed shares and would be closed to new applicants
• A separate listing category for international secondary listings, replicating standard LRs with continuing obligations (e.g. in relation to corporate governance) tailored to a ‘secondary’ listing
• the req for a three year financial and revenue earning track record and a clean working capital statement will be removed as conditions for listing, but prospectuses will still require disclosure of substantive financial info
• Dual-class share structures (DCSSs) will be permitted without prescribed sunset provisions but with limits on who may hold enhanced voting rights
• the need for a mandatory controlling shareholder (or relationship) agreement with a controlling shareholder
• no shareholder approval will be required for Class 1 txns, but additional info (most notably elements of the financial information currently required in class 1 circulars) must be included in Class 1 announcements
• No shareholder approval will be required for large related party txns and the threshold for a substantial shareholder under the RPT rules will be increased from 10% to 20%
• All issuers listed on the single segment must adhere to the UK corporate governance code on a ‘comply or explain’ basis
• Relaxing the reqs for sponsor competence such that a firm’s auth can be maintained if it has submitted a sponsor declaration to the FCA in the previous five (rather than three) years