Background

The Department for Business, Innovation and Skills (‘BIS’) announced in September 2012 that it had developed proposals with the London Stock Exchange (the ‘LSE’) to attract high growth companies to list their businesses on the LSE (see previous DechertOnPoint dated September 2012). The UK government believes that action is needed because European mid-sized high-growth businesses are currently under-represented on the UK public markets. There is also a concern that in the light of the US JOBS Act streamlining the rules on how growth companies can raise finance and list in the US, these companies will choose to list in the US if action is not taken in the UK.

In light of the above, on 13 February 2013, the LSE published for comment a draft rulebook for a new segment of the Main Market of the LSE for high growth companies (to be called the ‘High Growth Segment’). The consultation closes on 8 March and it is expected that the new regime will be in place by the second half of 2013.

The High Growth Segment has been designed to attract medium-sized companies, valued at between £300 million and £600 million, which can demonstrate fast revenue growth in recent years. The LSE says its new market will exclude companies incorporated outside the European Union and UK, as well as companies which are not trading entities (for example, investment companies and mineral resource companies at exploration stage). Importantly, the shares of a company admitted to the High Growth Segment are not admitted for trading to the UKLA’s Official List, and so the company is not subject to the Listing Rules of the UKLA going forward (however, as a prerequisite to joining this segment, companies will be required to clearly set out their intention to progress to the Official List over time as they become eligible).

The High Growth Segment will be open to both institutional and retail investors. It will not be a listed segment but will be underpinned by:

• the EU financial services directive (EU regulated market);
• the High Growth Segment rulebook;
• the Disclosure and Transparency Rules; and
• the LSE’s Admission and Disclosure Standards.

A copy of the draft rulebook is available on the LSE’s website. Comments on the draft rulebook are due by 8 March 2013. The LSE will confirm the final rules as soon as practicable following such date. The proposed rulebook will apply to an issuer and to its Key Adviser (see below) seeking to admit securities, or with securities admitted to trading on the High Growth Segment; it sets out the eligibility criteria, admission process and continuing obligations for issuers, and details of the Key Adviser’s role and obligations.

Admission Requirements

Admission to the High Growth Segment will be determined by the LSE on the basis of information and representations relating to eligibility given by prospective issuers, and their Key Advisers, in accordance with the High Growth Segment Rulebook. In order to be eligible for admission to the High Growth Segment, a company seeking admission (an ‘Issuer’) must satisfy the following criteria:

• the Issuer must have historic revenue (on a compound annual growth rate basis) of at least 20% over its three previous financial years;
• the Issuer must control a majority of its assets and (with its subsidiaries) be a trading business;
• at least 10% of the Issuer’s shares must be in public hands, which must, at the time of admission, have a value of at least £30 million (suggesting a floor level market capitalisation of £300 million therefore); and
• following admission, there must be a sufficient number of registered holders of shares so as to provide an orderly market in those shares.

The Issuer must also comply with the requirements of the Admission & Disclosure Standards issued by the LSE.

In order to be admitted to the High Growth Segment, an Issuer is required to:

• publish a prospectus which has been approved by the UK Financial Conduct Authority (the ‘FCA’, which will from April 2013 be the successor entity of the Financial Services Authority) or the competent authority of another EEA state; and
• appoint a ‘Key Adviser’ (see below) to assist it with the application process.

Although no time frame is required for the migration of the Issuer from the High Growth Segment to admission to the Official List, the Issuer must set out a non-binding indication in respect of such migration in its prospectus.

Continuing Obligations

As the shares of an Issuer admitted to the High Growth Segment are not admitted for trading to the Official List, the Issuer will not be subject to the UKLA’s Listing Rules. Instead, the Issuer will be required to comply with a number of continuing obligations set out in the draft rulebook, including that it must:

• retain control of its assets and continue to operate as a trading entity;
• obtain the guidance of a Key Adviser in certain circumstances, including where it proposes to enter into a ‘notifiable transaction’ or related party transaction. A notifiable transaction is a transaction in respect of which any percentage ratio from the class tests (as detailed in the rulebook) is 25% or more. The class tests set out in Annex 1 of the rulebook mirror those class tests set out in Annex 1 of Listing Rule 10 (which apply to companies admitted for trading on the Official List); and
• notify a RIS upon the occurrence of certain events, and maintain a website containing certain specified information about the Issuer.

The Issuer will also be required to report on its corporate governance practices in their annual reports and include a ‘comply or explain’ statement; it is likely that Issuers will look to comply with the UK Corporate Governance Code, given that they will be intending to seek a premium listing in due course.

Key Adviser

The Issuer is required to appoint a Key Adviser at admission to the High Growth Segment, and should seek guidance from the Key Adviser for certain events occurring after admission in order to ensure that high standards of corporate governance are maintained across the Main Market. The role of the Key Adviser is largely based on that role undertaken by a sponsor of a company on the Official List.

Firms that wish to act as Key Advisers in relation to the High Growth Segment must obtain prior approval of the LSE to act in such capacity. The LSE will not grant its approval unless the applicant firm:

• is an authorised person (as such term is defined in the FCA handbook) included on the FCA’s list of sponsors;
• is competent to perform the role (it is not permitted to delegate any of its functions); and
• has appropriate systems and controls in place (governing reporting lines, employee supervision, compliance, staffing and conflict management) to ensure that it can carry out its role as required pursuant to the rulebook.

The responsibilities of the Key Adviser include:

• providing assurance to the LSE when required that the responsibilities of the Issuer have been met;
• providing explanations or confirmations to the LSE that an Issuer is complying with the rulebook and the Admission & Disclosure Standards; and
• guiding the Issuer to understand and meet its responsibilities under the rulebook and the Admission & Disclosure Standards.

Commentary

It comes as no surprise to see the UK government and regulators doing all they can to attract high growth companies to the UK public markets. The new High Growth Segment should provide a greater choice of financing routes for companies, and may well offer an alternative to AIM for investors looking to invest in growing companies offering a higher degree of certainty of progressing to a full premium listing. However, we have of course seen several attempts in the past to ease admission and ongoing requirements to help young, fast growing companies (examples include AIM and techMARK). It would be wrong to overlook, however, that the key drivers in the choice of listing venue for high growth companies remain the underlying valuation of the company’s stock, liquidity in the after-market and the quality and depth of the research provided to the market. Commentators are clear that until London can bridge what many perceive to be a gap between the LSE and NASDAQ in these areas, adding a new market ‘limb’ may not of itself result in the desired rush of London bound high growth IPOs.