UK overhauls listing rules in bid to lure IPOs to London: What has changed?

The new rules allow companies to carry out more activities without putting them to a shareholder vote, the UK’s Financial Conduct Authority said Thursday. They also make it easier for companies to have two classes of shares, a structure that’s often favored by entrepreneurs or early-stage investors who want to have a significant role in businesses even after they have gone public. 

“We do not believe the status quo is an option,” the FCA said in a policy statement. “We have kept in mind that investors already choose to put their money in companies listed outside the UK, where the costly obligations we are removing do not exist. We believe institutional investors have the ability and heft to steer the companies they co-own.”

The FCA proposed rewriting the listings rules in May 2023 in the midst of a highly-charged debate about London’s future that was sparked by Cambridge-based technology company Arm Holdings Plc’s decision to list in the US. It later offered up a draft of the rules in December, following a dramatic drop in the number of new listings in London and a bevy of companies seeking to move their shares to New York. 

That all renewed concerns about whether the UK can retain its place as one of the world’s top financial centers while it suffers from less liquid markets after Brexit. There’s also widespread belief that UK investors have less appetite for growth stocks compared to the US and Asia.

“These new rules represent a significant first step towards reinvigorating our capital markets,” Chancellor of the Exchequer Rachel Reeves said in the statement, adding that the changes are bringing “the UK in line with international counterparts and ensuring we attract the most innovative companies to list here.”

The new rules, which have been months in the making, amount to regulators’ biggest overhaul of the UK’s listings regime in more than three decades. They will apply from July 29.

When it comes to significant transactions, companies will now have more flexibility on the timing and content of the disclosures they’re required to make, the FCA said. The regulator acknowledged that it was aware some market participants wouldn’t be happy with its decision to not require companies to seek shareholder approval for significant and related-party transactions.

“We’ve been very upfront and very clear throughout that these changes will mean greater investor risk,” Sarah Pritchard, executive director of markets and international at the FCA, said in an interview with Bloomberg Radio. “That said, we do see investors invest internationally where these obligations don’t exist. And we think that these changes better reflect the risk appetite that we need to achieve growth.”

Institutional investors will also be allowed to hold enhanced voting rights, though the FCA did introduce a new 10-year deadline for investors to exercise these rights in order to protect future investors in a company. 

Still, Pritchard cautioned that more would need to be done to revive the UK’s moribund equity capital markets. Indeed, the depth of liquidity in US public markets and less scrutiny over executive pay have been among the factors that have lured companies to New York. 

“Regulatory reform is only one of the changes required to reinvigorate the UK’s public markets,” said Claire Keast-Butler, a partner at the law firm Cooley.