THOUGHTS ON UK FCA CONSULTATION ON SOVEREIGN CONTROLLED COMPANIES
The UK’s Financial Services Authority has published a consultation paper on creating a new category for sovereign controlled companies in the existing “premium listing” segment. This has been prompted by the public debate over the international listing choice for the Saudi Aramco IPO, which London is reportedly competing for vs. New York as well as Hong Kong, Tokyo, Singapore and Toronto.
It’s slightly amusing to point out that the name of the Premium Listing was a deliberate marketing choice in 2010, replacing the previous, less pejorative, Primary and Secondary listings. As far as I’m aware, none of the competing exchanges above have such a differentiation that – artificially or otherwise – creates a halo effect around the top tier.
Leaving that aside, I believe it’s healthy for the market to reflect regularly on its operation, and identify areas where regulation can be improved to increase market attractiveness, while preserving the benefits of the strong investor protections built up over decades. And the Saudi Aramco flotation is a prize worth having, both for the initial transaction and the likely precedent that will set for other Saudi, Middle Eastern and global sovereign-owned companies looking for an international listing. Which would be a good outcome in an otherwise-shrinking world of equities.
Let’s go into some of the details and our views on the implications:
The concessions are specific, and for sovereign controlled entities only
Investors have expressed significant concern at any dilution of the listing obligations, and reminded the FCA of the importance to maintain the reputation of London as a high quality market. There are however only two concessions, which last only as long as the relevant sovereign owns more than 30%.
Firstly, the sovereign will not be considered a related party ie transactions between the sovereign and the company do not require approval from the independent shareholders. The FCA’s chief executive said the reason for this was “You can’t use these rules to fetter the discretion and control of a state over its subjects and the companies in its jurisdiction.” As a practical matter, one has to agree. Although I would point out the FCA isn’t seeking to retroactively impose this restriction on an existing listed company, which to a cynical observer might change this from a practical matter to a marketing decision.
Secondly, the controlling shareholder rules will not apply in respect of the sovereign shareholder. These rules are broadly i) a controlling shareholder agreement must be entered into with containing certain mandatory independence provisions, ii) the process for electing independent directors, and iii) the process for de-listing from the Premium Segment. Of the three, the second might give some pause. The current rules state that independent directors must be approved by independent shareholders as well as by shareholders as a whole. This may not be as bad as it sounds – as I mention in the next section.
All other listing requirements remain, in particular investor protections and corporate governance
The sovereign controlled issuer will still need to fully enfranchise all shareholders irrespective of where they hold their shares and in what form.
They will also need to comply with the UK Corporate Governance Code, something which is a sticking point for many foreign issuers. While I noted in the previous section the bar for electing independent directors is lowered, the company’s obligations to Comply or Explain with the Code remain. Independent directors still need to be properly independent, and the issuer is required to confirm this annually by stating whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director’s judgement. Which is a significant protection that works well in the UK market.
The requirement to be carrying on a main business is an important protection
The sovereign controlled issuer cannot be an arm of the state. In its consultation paper, the FCA states that any company applying for a listing must “demonstrate it will be carrying on an independent business as its main activity…the granting of, or the requirement to grant, security over its business in connection with the funding of the sovereign controlling shareholder is a factor which may indicate an applicant does not carry on an independent business”. [FCA CP 17/21 paras 3.28-3.29].
FTSE Index inclusion isn’t automatic
FTSE Russell has pointed out that “The index ground rules include the requirement to have a premium listing in London, an assigned nationality of UK, and minimum free floats of 25% for UK incorporated companies and 50% for non-UK incorporated companies. All these requirements will remain unchanged”. Given the very obvious Tadawul primary listing, and the rumoured 5% free float, I’d suggest that the risk of investors being forced to buy Saudi Aramco as a result of UK index following will be small.
Although I would be remiss not to point out the circumstances that might create such an issue. Where a company has only a UK premium listing – for instance, from a small country without a domestic stock exchange – a 50% free float would in theory allow entry into the UK index series. This risk is nevertheless unchanged from the current status quo.
GDRs included – but why for sovereign controlled issuers only?
Global Depository Receipts are an instrument that allow international investors to own and trade hard-currency stock instruments, on an international exchange, without having to own the underlying shares which can be complex or onerous to do directly. And the GDR is also a solution when it is not possible to list the ordinary shares outside of the country for settlement or registration reasons.
The proposals allow the sovereign controlled issuer to elect to list GDRs instead of the ordinary shares. These GDRs will have to observe the full requirements of the Premium Listing, governance regulations, working capital statement, class tests and all, including the need to retain a Sponsor firm. This will materially increase the investor protections vs. the current Standard Listing which is the only route that GDRs can take currently.
In this context, it seems odd that a GDR issuer that might wish to comply with the Premium Listing requirements, but is not owned by a sovereign, is not permitted to sign up to the higher level of listing. Something that may require further thought.
What happens when the sovereign sells below 30%?
It’s up to the company. If it has ordinary shares listed, it can choose to transfer to a full Premium Listing without a shareholder vote, as the concessions fall away and the investor protections therefore increase. Otherwise, it’s faced with a choice of demotion to Standard Listing, or delisting. Neither of which seem particularly attractive.
GDR holders have it tougher. They are required to move to a Standard Listing, which has to be approved by the independent shareholders. But if the GDR issuer is willing to continue maintaining the Premium Listing investor protections, why should it be forced to move to a lower rank? Which is in part why I questioned above the rationale for the Premium-GDR segment being open only to sovereign controlled companies.
I’d like to finish by pointing out the London Stock Exchange’s statement that “Providing discretionary access for investors to a broad range of UK and global companies is fundamental to the effectiveness and competitiveness of UK Primary Markets and to London’s role as the most international financial centre.” The emphasis is mine. UK investors are not required to buy a London-listed Saudi Aramco. But for those that wish to, these proposals will make it much easier to buy, with the addition of the clear majority of standard UK investor protections, than if they were only able to buy directly on the Tadawul.
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