In the wake of recent high-profile corporate governance controversies the UK Financial Conduct Authority (“FCA”) has, this week, issued its proposed new Listing Rules which, when implemented, will give enhanced rights to minority investors in large companies with a premium listing on the London Stock Exchange. 

Following a year-long consultation the FCA has outlined a series of significant new protections for minority shareholders giving them additional voting rights and greater influence over certain key corporate decisions. In addition the FCA is consulting on certain aspects of the proposed new regime which have been revised from the original proposals. The new regime is intended to deal with cases where a controlling shareholder of a premium listed company does not maintain an appropriate and arm’s length relationship with that company.

The new rules, which are outlined below, will apply to all companies with a premium listing on the main market of the London Stock Exchange with a market capitalisation in excess of £700 million where there is a controlling shareholder holding 30% or more of that company’s shares. Affected companies (which will include approximately half of the current FTSE 100 companies) will be required to enter into an agreement with their controlling shareholder formalising their relationship in addition to making certain changes to their constitutions and/or corporate procedures to give independent shareholders additional rights. 

The FCA has not, however, gone as far as some feared it might by demanding an increase in the ‘free float’ (i.e. the proportion of a company’s shares in public hands) requirement above the current level of 25%. The FCA views the package it is implementing as “an important and necessary step in promoting the integrity of the Listing Regime and ensuring an appropriate degree of investor protection”.

The FCA’s Minority Shareholder Protection “Package”

The package put forward by the FCA represents, in its view, “targeted measures to reinforce shareholder protections in situations where they need to be strengthened, rather than rules that would raise the general level of regulation.” The FCA “does not believe that the new regime will increase the regulatory burden on companies (and controlling shareholders) that comply with expected standards of behaviour but will have a very significant impact where this is not the case”.

The package introduces the following protections for minority shareholders:

• a requirement for an agreement between a company and its controlling shareholder;
• additional voting power for minority shareholders when electing independent directors where a controlling shareholder is present; and
• enhanced voting power for minority shareholders where a company with a controlling shareholder wishes to cancel its premium listing.

In addition, the FCA has expanded the general transparency requirements for premium listed companies in a number of key areas to ensure that shareholders are able to exercise their voting rights and engage with issuers in an effective manner.

Subject to various transitional arrangements, the FCA intends to implement the full and final package of measures in mid-2014. 

Controlling Shareholder Agreement

The FCA is significantly expanding the Listing Regime by bringing the relationship between a premium listed company and a controlling shareholder (the definition of which will include associates and persons acting in concert) within the regulatory perimeter and giving boards and, in particular, independent directors, responsibility to comment on the appropriateness of such relationships.

The new rules will require a written agreement to be entered into between the company and its controlling shareholder to regulate the relationship between them and ensure that the company is able to operate independently of that shareholder. 

The FCA has made a proposal for a “robust response” in situations where an inappropriate relationship between a company and its controlling shareholder risks damaging the interests of independent shareholders, namely where:

• a premium listed company has failed to put an agreement in place;
• an independence provision in such an agreement is not being complied with (by either the company or its controlling shareholder); or
• an independent director does not agree with certain related statements in the company’s annual report.

Where such a situation exists, enhanced oversight measures would be activated and minority shareholders would be given the right to vote on (and veto) all transactions between the company and its controlling shareholder. These sanctions would stay in place until the next annual report in which the board gives a clean statement of compliance (having entered into, and complied with, all relevant agreements) for the entire preceding financial year, with no dissent from the independent directors.

The FCA is proposing a transitional period of six months for agreements to be put in place and there will be a similar grace period for companies where a controlling shareholder emerges at a premium listed company that is not currently controlled by a controlling shareholder. 

Independent Directors

Independent shareholders are to be given a meaningful say in the election of independent directors. Premium listed companies with controlling shareholders will be required to ensure that their constitutions provide for a dual voting structure for the election of independent directors. The election of independent directors will be required to be separately approved both by the shareholders of the company as a whole and the independent shareholders as a separate class.

If the necessary majorities are not obtained in both votes, the company will be required to wait at least ninety days before seeking another vote on the election, although (if sought) the second vote is required only to be passed by a simple majority of all shareholders.

This structure has been proposed to give the independent minority shareholders a stronger voice in the election of independent directors and to encourage dialogue between companies and their independent shareholders before proposing independent directors but without giving minorities undue control by being able to block an appointment outright.

In addition, the FCA is proposing a requirement for enhanced disclosures to be made when independent directors are nominated so that shareholders are fully informed in making their voting decisions. There will be particular focus on transparency of the nature of any relationship such director may have with the controlling shareholder.

The changes are likely to necessitate affected companies making changes to their constitutional documents. The FCA therefore proposes to delay applying these requirements until the next general meeting of companies for which notice has not already been given as at the time the new rules are implemented.

Cancellation of Premium Listing

Currently, a company wishing to cancel its premium listing must obtain the consent of 75% of its shareholders in a general meeting. This threshold was introduced following an FSA consultation in 2003 (previously no vote had been required). It was acknowledged at the time of the changes that the Listing Regime could not completely protect all shareholders and it was important not to create a system whereby a small minority of shareholders could frustrate the legitimate actions of the large majority. The 75% requirement was therefore seen as an appropriate balance between protecting investors and restricting the activities of a company.

The FCA is revisiting this issue and is presenting proposals to require the approval of a majority of votes of the independent shareholders of a company where a company with a controlling shareholder wishes to proceed with a cancellation of its premium listing. This requirement would be in addition to the affirmative vote of 75% of the shares of those voting on the resolution although the FCA does not propose to stipulate whether this may be achieved via one or two votes instead it will be left to the issuer’s discretion. The FCA is presenting the maintenance of the existing arrangements as an alternative to this proposal.   

Anti-Avoidance Measures 

The FCA is alive to the fact that companies may seek to implement corporate structures to evade the minority protections proposed. It is therefore introducing a requirement that only holders of premium listed shares may vote on matters required by the Listing Rules because the company is premium listed.

The FCA is also introducing new Listing Principles requiring that:

• each share within a premium listed class should have equal voting power to prevent super-voting shares being included within premium listed classes of shares; and
• where an issuer has multiple lines of premium listed shares, the voting rights of each class are broadly proportionate to the relative interests of those classes in the equity of the company.

It is proposed that issuers will have two years to make the necessary changes to their corporate structures to comply with the new requirements.

Other Enhancements to the Regime

To enable shareholders to engage with companies more effectively the FCA is proposing that, rather than waiting to make a disclosure until the next annual report, companies be required to announce smaller related party transactions (which do not require shareholder approval) as soon as possible. The content of such disclosures will also be required to be clearer, however the FCA accepts that the time it spends scrutinising standard confirmations created undue delay and it has in return pledged to reduce the administrative burden for companies completing and announcing such transactions.

In addition, the FCA is introducing a requirement that any Listing Rules disclosures should be in a single identifiable section of the annual report or that the report contains a cross-reference list indicating where the various disclosures can be found.

The additional disclosure requirements for annual reports are likely to be imposed on premium listed companies with accounting periods that end at least three months after the rule has been implemented. 

The FCA also intends to provide guidance on indicators of when a business is not independent (in contravention of the requirement for premium listed commercial companies to operate independent businesses) and these requirements will be extended to mineral and scientific research-based companies. Finally, the scope of the Listing Principles requiring all listed companies to maintain appropriate systems and controls and to deal with the FCA in an open and co-operative manner is being extended to include standard listed companies.

Comment

The FCA’s proposals represent a marked effort to increase transparency in order to give greater power to independent and minority shareholders in the London Stock Exchange’s largest companies. The proposals are a clear statement of intent that, in the light of some recent high profile disputes, the FCA is seeking to main integrity in the market by targeting inappropriate relationships between premium listed companies and their controlling shareholders and the resulting abuse of minority shareholders.

There was considerable dialogue with the investment community in relation to the FCA “package” and there are a number of areas where the FCA either amended its proposals in response to market concerns or, in the case of amendments to the ‘free float’ requirement pulled back from their proposed changes altogether.

The FCA argues that most companies which will be affected by the new rules already behave in line with the provisions requiring agreements with a controlling shareholder and compliance will therefore only be a matter of codifying existing practice. It remains to be seen whether or not businesses instead take the view that the FCA has increased the administrative burden and turned minority protection into minority control and opt for listings on other markets.