Standard listing: the jury’s still out?

While there has not been the rush that some commentators anticipated of UK companies to standard listings on the London Stock Exchange (LSE)’s main market (there has been barely a trickle), there continues to be interest and speculation about whether this market will take off. This article considers whether there is a role in UK equity capital markets for standard listings in the future.

From 6 April 2010, the listing rules introduced the new two-tier listing regime, which allows companies wishing to list in London, whether they are overseas companies or UK companies, to choose between a premium and a standard listing. Premium listings are only open to equity securities that are issued by commercial companies, and closed and open-ended investment entities whereas standard listings are available for equities (excluding investment entities), global depositary receipts, and debt and securitised derivatives.

The premium listing is the same as the previous regime’s super-equivalent primary listing, which required more onerous standards than those required by the EU securities laws. Standard listings are only subject to the minimum European requirements.

Standard listed securities will be admitted to the Official List of the UK Listing Authority (UKLA) and can be admitted to trading on either the main market of the LSE or the PLUS-listed market of the PLUS Markets Group. These are both regulated markets for the purposes of the Prospectus Rules, so in each case a prospectus would be required to be prepared that complies with the relevant contents requirements set out in the annexes to the Prospectus Rules, which form part of the Financial Services Authority Handbook: and which is approved by the UKLA prior to publication.

Some of the advantages of a standard listing and areas in which the lighter regulations may appeal to issuers are as follows:

  • It gives companies a public listing on the main market of the LSE.
  • There is no requirement to appoint a financial sponsor, such as an investment bank or broker, in respect of the company’s corporate activities.
  • The UK Corporate Governance Code will not apply in relation to the company’s corporate governance, although a company would still be required to comply with Rule 7.2 of the Disclosure and Transparency Rules which, require a company to make a statement in the annual directors’ report as to its corporate governance practices.
  • The Model Code does not apply in respect of the dealing in the company’s securities by directors and employees, although the laws relating to insider dealing would still apply.
  • The restrictions on related party transactions do not apply.
  • Shareholder approval is not required for significant transactions.

However, there are concerns as to whether there will be sufficient liquidity in the market for shares in companies with standard listings, in particular because they will not be included in any of the FTSE UK series indices, which will rule out a large number of funds and institutional investors. Companies seeking a standard listing will also have to make their own arrangements with brokers and market makers to support the market in their shares. In addition, there is the concern that the lower corporate governance requirements for standard-listed companies and the absence of a sponsor or nomad to police transactions will leave the door open to abuse.

Indeed, the LSE does not appear to be actively promoting standard listings and there have been no new UK company admissions to LSE as standard listings since 6 April 2010. The only admission of note has been Hugh Osmond’s Horizon Acquisition Company plc (listed as a secondary listing in February this year, with a view to becoming standard-listed from 6 April 2010). The approach taken here seems to be that of using the standard listing as a stepping stone to a premium listing.

Horizon Acquisition has been able to obtain a standard listing as a cash shell (whereas premium-listed companies require at least a three-year audited operational track record) and will be able to make acquisitions without the shareholder approval that would be required for a premium-listed company under the class test rules. Once it has made its major acquisition or as part of that transaction, it could switch to a premium listing, again without shareholder approval, assuming the enlarged group could then satisfy the premium listing eligibility criteria (as confirmed by its sponsor). Horizon Acquisition may therefore set a precedent for the route to the main market for cash shells (which are still a significant feature of AIM and PLUS-quoted, but not the main market).

In other cases, a standard listing may prove attractive to companies that are already publicly traded on AIM or PLUS-quoted and that consider themselves to be too big for the purpose for which those markets were originally established, but which do not wish to be subject to the extra cost and regulatory burden of a premium listing. If such companies have sufficient reputation and shareholder loyalty, a move to a standard listing may not be affected by the current negative perception of standard listings.

In conclusion, while it seems unlikely that the standard listing will displace premium listings or AIM as the main routes to the equity capital markets in UK, it is clear that standard listings are becoming a venue for more companies for which flexibility and the low regulatory burden are prime considerations. However, there have been so few new standard listings that we will have to wait some time before the trends emerge that will define the role of the standard listing in the UK equity capital markets.