Corporate update: the latest corporate law developments August 2024

FCA publishes final listing rules

On 11 July 2024, the FCA published the final version of its new UK Listing Rules (New UKLR) in the most significant overhaul of the UK listing regime in more than 30 years. The New UKLR will be effective from 29 July 2024.

The new simplified regime, with its increased flexibility and more disclosure-based approach, is intended to make the UK markets more competitive internationally, and to encourage a greater range of companies to list in the UK.

Background

The new listing regime is the culmination of extensive market engagement and feedback, starting with the publication of Lord Hill’s UK Listing Review in March 2021.

Following numerous consultations and discussion papers, the FCA’s finalised proposals were published in December 2023 (CP23/31), and the New UKLR largely reflects those proposals. However, the FCA invited market participants to submit views on specific aspects of the FCA’s approach, and in response to that feedback, the FCA has now made some changes to its original proposals. Those changes, and the final version of the New UKLR, are set out in the FCA’s Policy Statement (PS 24/6).

Key features of new listing regime

• New ESCC listing category: As anticipated, the current premium and standard listing segments for commercial companies will be replaced with a simplified single category for equity shares of commercial companies – known as ‘equity shares (commercial companies)’ (ESCCs). The rules of the new ESCC category are based on current premium segment rules but with significant relaxations to eligibility criteria and continuing obligations.
• 11 listing categories: In addition to the new ESCC, there are ten further listing categories (including four new categories), each with tailored obligations under the New UKLR.
• ESCC continuing obligations: Significant transactions (formerly class 1 transactions) and related party transactions by ESCC companies will no longer require shareholder approval. However, more detailed and prescribed disclosures will be required in transaction announcements. Shareholder approval will continue to be required for reverse takeovers.
• Sponsors: The sponsor regime will be retained, with the sponsor’s role remaining largely unchanged on listing applications. However, there will no longer be a requirement to formally appoint a sponsor for a significant transaction (and no sponsor declaration will be needed.)

Eligibility for new ESCC category

Although based on the current premium segment criteria, the eligibility criteria for the new ESCC category will give greater flexibility to companies wishing to apply for listing. Companies will no longer need to have a three-year revenue track record, three years of audited historical financial information nor a “clean” working capital statement. This should make it easier for high growth and earlier stage companies to join the new category.

The current independence and control of business eligibility requirements will no longer apply, except in the case of an ESCC company with a controlling shareholder. Those companies must still demonstrate that they are able to carry on their business independently but will no longer be required to enter into a relationship agreement with their controlling shareholder.

The eligibility requirements for companies with a dual class share structure (DCSS) are significantly relaxed, although there are still some circumstances when enhanced voting rights cannot be cast. Also, only persons who were directors, investor/ shareholders or employees of the issuer at the time of admission will be eligible to hold enhanced voting rights. However, in a change from the FCA’s original proposals, any legal person that is an investor/ shareholder (such as a corporate institutional investor) will now be able to hold enhanced voting rights, but there will be a ten year sunset period on those rights.

Continuing obligations for ESCC companies

Significant transactions

In a key change from the current premium listing requirements, non-ordinary course of business transactions that currently meet Class 1 thresholds (now called “significant transactions”) will no longer require prior shareholder approval or the publication of an FCA-approved circular. Instead (and illustrating the FCA’s move to a more disclosure-based regime), issuers will have to include more information about the transaction in their RIS announcements. In a change from its original proposals, the FCA will allow issuers more flexibility over the timing of certain disclosures, with some information no longer having to be included in the initial RIS announcement.

An ESCC company will still have to obtain shareholder approval for some transactions, including a reverse takeover, share buy-back arrangements and non pre-emptive discounted share issuances.

Related party transactions (RPTs)

As originally proposed, ESCC issuers will no longer need prior shareholder approval for a transaction with a related party. However, for larger RPTs only (where the non-ordinary course transaction represents 5% or more in any of the class tests), the company will need to make an RIS announcement that includes prescribed information. As currently required, a sponsor will also have to be consulted and a “fair and reasonable” confirmation obtained. Fewer transactions will be caught by the RPT rules as the threshold at which a shareholder becomes a related party has been increased to 20% (from 10%).

Listing categories in the new regime

There are five new listing categories – ESCC, Shell companies (SPACs); Transition, Secondary listings; and Non-equity shares and non-voting equity shares (e.g. preference shares.) Other existing categories are retained, including Closed-ended investment funds, OEICs, and debt securities.

The new Transition category will enable existing standard segment companies to continue as they are, with its rules being based on the current standard segment rules. Transition companies can, however, apply to transfer to the ESCC in the future.

The Secondary listing category (known as “international commercial companies secondary listing”) is designed for non-UK incorporated companies with more than one listing, where the primary listing is on a non-UK market. Its rules are based on the current standard segment listing rules.

Implementation

The New UKLR will become effective on 29 July 2024, with all commercial companies currently listed on the premium segment being “mapped” to the new ESCC category. Existing standard segment companies will be moved either to the new Transition or Secondary Listing categories.

Transitional arrangements are in place for “in flight” applications (i.e. where an application has been submitted but the shares have yet to be admitted), and for ongoing listing rule transactions.

The London Stock Exchange (LSE) has also published a notice confirming the proposed changes to its Admission and Disclosure Standards to reflect the listing regime changes. The new Standards will also be effective from 29 July 2024.

Court of Appeal rules against broker in claim for financing fee

In a stark warning on the dangers of ambiguous drafting, the Court of Appeal has held that the word “private” applied to all types of financing listed in a broker’s engagement letter, and not just to the first financing structure detailed in the list. The placement of this single word resulted in the broker losing out on commission worth over $7m (Cantor Fitzgerald & Co v YES Bank Ltd [2024] EWCA 695).

Facts of the case

The Indian commercial bank, YES Bank, was experiencing severe financial difficulties and so it engaged several financial institutions to assist it in raising additional funds. One such financial institution was the US broker-dealer, Cantor Fitzgerald (Cantor).

Under its engagement letter with YES Bank, Cantor was entitled to 2% of the proceeds of any “Financing” raised from specified investors listed in a schedule to the letter. “Financing” was defined as “one or more financing(s) through the private placement, offering or other sale of equity instruments in any form…”

YES Bank subsequently raised capital through a “Further Public Offer” on the Indian capital markets, with the involvement of three of the investors listed in Cantor’s engagement letter. Cantor claimed commission on the amount raised from the three investors (in excess of $7m). YES Bank refused to pay, arguing that the commission was only payable on funds raised through a private offer, whereas it had in fact raised funds through a public offer.

The High Court found in favour of YES Bank at first instance. Cantor appealed.

Court of Appeal

The Court of Appeal dismissed Cantor’s appeal, finding that no commission was payable.

It held that the word “private” in the definition of “Financing” attached to each of the structures detailed in that definition, and not just to the first word – placement – as argued by Cantor.

In reaching that decision, the Court had to interpret the ambiguous drafting in the engagement letter to try to identify what the parties’ intention would have been. This required the Court to consider the ordinary meaning of the words used in the context of the contract as a whole, with a view to establishing what a reasonable person would have understood by them.

Factors highlighted by the Court when interpreting the engagement letter included the following:

• Although there is no firm grammatical rule that an adjective at the start of a list of nouns qualifies them all, the nature of the list may indicate that it does, and a reader will naturally make that assumption unless something in the drafting suggests otherwise.
• The parties did nothing to counter that assumption. If they had meant for the engagement to cover all forms of equity financing, they could have achieved that with simpler drafting.
• Although the term “private placement” is a term of art understood by those with a relevant financial background, it does not prevent the adjective “private” also being applied to “offering” and “other sale” if that is what the natural meaning indicates.

Comment

The case is a salutary reminder that ambiguous drafting can have extremely costly consequences. Whilst contractual parties will often spend hours finalising the operative parts of a contract, clauses that amount to generic, boilerplate drafting (which is how the Court described much of the engagement letter) may well be overlooked.

Care should always be taken to ensure that all contractual documents (including standard form contracts) are tailored to the specific circumstances of the transaction. Clear wording should always be used and adding examples or additional wording – for the avoidance of doubt – may well prove to be invaluable.

Particular attention should be paid to complex clauses (including definitions), where instead of listing items in one paragraph, it may be clearer to divide the list into shorter sub-clauses. Relevant adjectives can then easily be applied to the appropriate sub-clauses only, avoiding ambiguity and, hopefully, expensive mistakes.

Interpretation of leaver provisions in articles of association

In Syspal Capital Ltd v Truman and another [2024] EWHC 1561 (Ch) the High Court had to consider the correct interpretation of provisions in a company’s articles of association in order to determine the proper sale price for shares held by one of its former directors.

Facts of the case

The relevant company had two directors, Mr Truman and Mr Roberjot. Mr Truman held 24% of the company’s shares and the other 76% were held by a company controlled by Mr Roberjot. Mr Truman was also a director and employee of the company’s trading subsidiary.

In October 2022 Mr Truman was dismissed as an employee of the subsidiary and was then removed as a director of that subsidiary the following month. At that time, however, he remained a director of the holding company, a position from which he eventually resigned in May 2023 when he turned 65.

The company’s articles of association contained provisions requiring an employee or director to transfer their shares if they left the company. The key clause provided that: “If any Employee Member shall cease for any reason...to be employed as an employee, director or consultant of a Group Company (and does not continue in that capacity in relation to any Group Company), then a Transfer Notice shall be deemed to have been served…on the date of such cessation.” [emphasis added].

The key issue was exactly when Mr Truman was deemed to have served a Transfer Notice as this affected the amount he was entitled to be paid for his shares:

• if the Transfer Notice was deemed served in October 2022, Mr Truman would receive “Market Value” for his shares which took account of a minority discount; but
• if the Transfer Notice was not deemed served until May 2023, Mr Truman would receive “Fair Value” which valued his holding on a straight-line pro rata basis by reference to the company’s total value.

The difference between the Market Value and the Fair Value of Mr Truman’s shares was “very significant”. The question of which one Mr Truman was entitled to turned on the interpretation of the words “in that capacity” in the articles of association.

The company argued that this referred to the capacity in which the relevant Employee Member ceased to be employed. This meant that when Mr Truman ceased to be employed by the subsidiary in October 2022, as he did not then continue in that capacity (i.e. as an employee) of any other group company, the provision was engaged and a Transfer Notice was deemed to be served.

But Mr Truman said that the words “in that capacity” referred to the three different ways in which an Employee Member might be engaged to work for a group company, i.e. as an employee, director or consultant. On this interpretation, in October 2022 when Mr Truman ceased to be employed by the subsidiary, he had continued to be engaged in one of the relevant capacities (i.e. as a director of the holding company). That meant that the relevant provision was not engaged at this point. Only when Mr Truman finally resigned as a director of the holding company on his 65th birthday in May 2023 was a Transfer Notice deemed served.

Decision

The Court agreed with Mr Truman finding that the word “employed” in the relevant provision was not used in the strict sense of being an employee under a contract of employment. Instead, it was used more broadly to also cover being engaged as a director or consultant. The reference to “in that capacity” related back to those three different capacities so the provision did not apply when Mr Truman ceased to be employed by the subsidiary but continued as a director of the holding company. The Judge said this was a more natural reading of the wording and that it accorded with commercial common sense.

The Judge also said that the purpose of the provision in the articles was to ensure that if a shareholder stopped contributing to the day-to-day running of the business, the other shareholder(s) should be given the opportunity of buying that shareholder’s shares. But, particularly in private companies, it was common for a senior employee to retire from full-time employment whilst continuing to serve the business as a consultant. In those circumstances, the Judge did not think it was commercial good sense to require an individual to sell their shares and at the lower of two valuations.

Accordingly, the Judge found that Mr Truman was deemed to serve a Transfer Notice in May 2023 and so was entitled to the Fair Value of his shares.

Comment

It is common for the articles of association of a private company to contain compulsory transfer provisions so that when a shareholder who is engaged in the business leaves, they do not benefit from any increase in the company’s value after their departure (to which they will not have contributed).

Interestingly, in this case the Judge interpreted the relevant provisions as being for the benefit of the employee-shareholder since, taken as a whole, they ensured that he would receive Fair Value if he retired from all positions at 65 or through permanent incapacity, and his family would receive Fair Value if his shares were acquired on his death. The Judge disliked the company’s interpretation of the provisions which could have allowed the company to force a sale at a lower value by terminating Mr Truman’s employment for no good reason – which was exactly what Mr Truman said had happened.

First published in Accountancy Daily.