An overview of the new premium listing category for sovereign controlled companies (PS18/11).
On 8 June 2018, the FCA announced that it is creating a new premium listing category for sovereign controlled commercial companies (“sovereign controlled companies”), designed to recognize that a sovereign controlled company and the state that owns it have a different relationship to a company with a private controlling shareholder (PS18/11). This new category will be effective from 01 July 2018.
(See “New Premium listing category proposal for sovereign controlled companies” for the background to, and consultation on, these new rules.)
Overview of the new premium listing category
Sovereign controlled companies will have to comply with all of the rules for the premium listing category for commercial companies other than the following two requirements:
- a controlling shareholder agreement, and
- an advance sponsor opinion or advance approval by independent shareholders of certain transactions with the sovereign controlled company and its associates.
These will not apply to allow for the difficulties that sovereign controlled companies would otherwise have in meeting these requirements due to the way in which sovereign owners structure their controlling relationship. The FCA has also taken into account the fact that significant information will be in the public domain about the relationship between the issuer and the sovereign, and about the sovereign itself, which should allow investors to make an informed assessment about the relationship.
In response to the feedback received, the FCA has however, amended its original proposals so that some of the controlling shareholder and related party rules will apply to sovereign controlled companies. They will have to:
- allow independent shareholders to have an additional vote on the election of independent directors (and include these provisions in the company’s constitution), and
- comply with the disclosure obligations for related party transactions in Chapter 11 of the Listing Rules.
These companies will also have to comply with all other premium listing rules including carrying on an independent business as its main activity, having in place other systems and controls commensurate with being a premium listed company, compliance with the FRC’s Corporate Governance Code, proportionate voting rights and adherence to principles of a pre-emption regime.
What is a sovereign controlled commercial company?
A sovereign controlled commercial company is defined as an issuer in which a "State" exercises or controls 30% or more of the votes able to be cast on all or substantially all matters at general meetings of that company.
A "State" means:
- the sovereign or other head of a State in his or her public capacity
- the government of a State
- a department of a State, or
- an agency or a special purpose vehicle of a State, including an agency or special purpose vehicle of any of the above.
The State which is a sovereign controlling shareholder must either be recognised by the UK government as a State at the time the application is made or must be the UK. In its consultation paper (CP 17/21), the FCA stated that when assessing eligibility it will look at the substantive control being exercised by the State on a case by case basis. However, the FCA also stated that a passive stake held by a sovereign wealth fund is unlikely to demonstrate the requirement for substantive control by the State although this will be examined on the facts at the time of application.
As there is no restriction based on the jurisdiction where the company is incorporated or the nationality of the sovereign controlling shareholder, this new category is available to UK companies.
Related party transactions
As noted above, the disclosure obligations for related party transactions will now apply. The FCA has clarified that, for the purposes of the aggregation rules in respect of smaller and small transactions, the announcement of such transactions, rather than shareholder approval, will represent the ‘cleansing’ event that resets the aggregation process. Without this clarification, the disclosure obligations for companies with a sovereign controlling shareholder would exceed those applying to other premium listed companies in certain circumstances because companies would have to continue to disclose even very small transactions once the 5% threshold had been reached.
Controlling shareholder requirements
As noted above, the requirement for a controlling shareholder agreement will not apply to sovereign controlled companies. The FCA state that shareholders should have a clear understanding of the specific relationship between the sovereign controlled company and its owner as this disclosure should be included in the prospectus accompanying an IPO as it would normally be necessary information for investors, and in some cases would amount to a material contract. This, together with existing ongoing disclosure obligations (including in relation to related party transactions), should provide investors with sufficient transparency about the arrangements in place.
If the sovereign controlling shareholder ceases to hold at least 30%, the company will cease to be eligible for the new listing category and the FCA will have to be notified in such circumstances and discuss a transfer of listing category. If there ceases to be a sovereign controlling shareholder, this would constitute a breach of the continuing obligation and the FCA will have the ability to suspend and cancel the listing in the unlikely event that no proposal to re-categorise the issuer is forthcoming.
A vote of independent shareholders will not be required to transfer to the existing premium listing category for commercial companies as greater protections are afforded to shareholders under this category. A transfer to a standard listing or cancellation of listing will be subject to independent shareholder approval.
Although depositary receipts over equity securities are not eligible for a premium listing, they are eligible for this new premium listing category on the same basis as equity shares provided that the holders of the depositary receipts enjoy the rights attaching to the underlying equity shares and the underlying equity shares would be eligible for premium listing. To be eligible, the issuer of the underlying shares to which the depositary receipts attach will need to fully comply with the standards for this new listing category, as well as having the depositary receipts admitted to trading on a regulated market.
With respect to voting matters, for all shareholder votes required under the Listing Rules the vote must be a vote of the holders of the underlying equity shares other than in relation to a vote to transfer listing category or cancel the listing which would require the approval of the independent holders of the depositary receipts. The voting rights attaching to the underlying equity shares must “pass through” to the depositary receipt holder so that they can exercise their voting entitlements as if they were holders of the underlying equity shares. As a result, depositary receipt holders will have the full voting power implied by their proportionate equity interest and the votes will be exercised to reflect the depositary receipt holders’ instructions. All other rights afforded as a result of a premium listing (eg rights relating to a rights issue or open offer or in relation to a share buyback) will also be required to “pass through” to the depositary receipt holder.
The FCA acknowledges that the ability for a sovereign controlled commercial company to obtain a premium listing by listing depositary receipts over its underlying equity shares means that it will be possible for a sovereign controlled company to obtain a premium listing despite it having a free float of less than 25% in respect of its underlying equity shares (provided that it is able to satisfy the eligibility requirements in respect of the depositary receipts). This is because the free float requirement in respect of depositary receipts will be judged on having a sufficient number of depositary receipts in public hands rather than on having a sufficient free float in respect of the underlying equity shares.
The normal free float requirements will apply where the application relates to equity shares.
Inclusion in the FTSE UK index series is only available to premium listed companies. Whilst companies which are eligible for listing under this new category will be premium listed companies for these purposes the other eligibility criteria of FTSE, most notably nationality and free float, would also have to be satisfied for these companies to be eligible for inclusion in the FTSE UK index series.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.