The London Stock Exchange (the Exchange) has launched the High Growth Segment of the Main Market. The High Growth Segment allows fast growing businesses which intend in due course to seek a premium listing on the Official List but which do not yet meet the relevant eligibility criteria to be admitted to trading on a specially designed segment of the Main Market.
The launch of the High Growth Segment reflects the Exchange's determination to ensure that London remains an attractive capital raising venue for fast growing businesses. It also represents a clear response to the increased competition for such companies from other (primarily US) exchanges, and especially for those companies which might be deterred from seeking a premium listing by the "free float" requirement (i.e., the requirement that at least of 25% of the company's listed securities must be in public hands)1.
So has the empire struck back? Well, maybe. As regards the free float requirement, the launch of the High Growth Segment should be seen in the context of the recent proposals by the UK Financial Conduct Authority (the FCA) to introduce greater flexibility, by:
- providing additional guidance on the circumstances in which it will be likely to relax the free float requirement in relation to companies seeking a premium listing; and
- removing the requirement for a minimum absolute percentage free float for companies seeking a standard listing by basing the free float requirement for such companies solely on liquidity (in light of the number, nature and diversity of holders following admission)2.
While the High Growth Segment is a useful option for fast growing companies it is not entirely clear why a company would seek admission to the High Growth Segment when, following the implementation of the changes proposed by the FCA it would be able to obtain a standard listing with a lower free float and less burdensome continuing obligations (especially as regards significant transactions). As things stand, further rule changes seem likely, possibly involving the amendment of the eligibility requirements for standard listings to reflect the approach taken by the Exchange in relation to the High Growth Segment.
The High Growth Segment opened in late March 2013.
As the Main Market (of which the High Growth Segment is part) is a "regulated market" for the purposes of the Markets in Financial Instruments Directive, applicants will:
- be required to prepare and publish a prospectus in accordance with the EU Prospectus Directive; and
- be subject to the ongoing reporting and disclosure obligations set out in the EU Transparency Directive, including semi-annual reports, interim management statements and the obligation to announce inside information in accordance with the Disclosure and Transparency Rules issued by the FCA (the DTRs).
In addition, companies whose shares are admitted to the High Growth Segment will be required to comply with the:
- High Growth Segment Rulebook (the Rulebook); and
- Admission and Disclosure Standards, issued by the Exchange.
However, shares in companies admitted to the High Growth Segment are not admitted to the Official List. They are, however, admitted to trading. As a result, companies will not be required to comply with the Listing Rules issued by the FCA (the Listing Rules).
The key regulatory requirements are set out below.
To be eligible for admission to the High Growth Segment:
- Incorporation: The company must be duly incorporated in the United Kingdom or in another member state of the European Economic Area (EEA). This requirement is intended to ensure that applicants will be subject to the investor protection regime mandated under EU law. It would, however, be possible for companies which are incorporated outside of the EEA to establish a new EEA incorporated holding company and for the shares in that holding company to be admitted to the High Growth Segment;
- Activity: The company and its subsidiaries must comprise a trading business. For example, it cannot be an exploration focused mineral resources company or an investment entity;
- Governance: The company must control the majority of its assets. This is similar to the requirement for premium listed companies (under LR6.1.4R);
- Growth: The company must be able to demonstrate growth in audited consolidated revenue, prepared in a form consistent with that which will be adopted in its next published financial statements, of at least 20% on a CAGR basis over the previous three financial years;
- Free Float: At least 10% (rather than 25%, as for listed companies (LR6.1.19R (premium listing) and LR14.2.2R (standard listing)) of the securities to be admitted must be in public hands;
- Securities: The securities to be admitted must be equity shares;
- Value: The value of the securities in public hands must be at least £30 million, of which the majority must be raised at admission by the issue or sale of new securities; and
- Orderly Market: There must be a sufficient number of registered holders of the securities to be admitted to provide an orderly market in the securities following admission.
As mentioned above applicants must, in addition, prepare and publish a prospectus in relation to the securities to be admitted. This must be approved by the FCA or by the competent authority in another EEA State.
That prospectus must state that the company intends to apply for admission to the Official List in the future.
Finally, the company must have appointed a "Key Adviser" in relation to admission. The Key Adviser regime, which is described in more detail below, is loosely based on the sponsor regime for companies which have a premium listing on the Official List3.
As with listed companies, some of the eligibility criteria set out above are also continuing obligations (i.e., they must be complied with by the company while its shares are admitted to the High Growth Segment, and, if they are not, the company's admission may be cancelled). These include the free float requirement (as to which, see above).
Appointment of Key Advisers
In addition, the company is required to obtain the guidance of a Key Adviser to assist it where it (or any of its subsidiaries) proposes to enter into a significant transaction or where a significant event occurs, including any:
- notifiable (i.e., major) transaction: For this purpose, the significance of the proposed transaction is, as with premium listed companies, assessed by reference to "class tests". A notifiable transaction is broadly equivalent to a Class 1 transaction under the Listing Rules)4;
- related party transaction;
- reverse takeover;
- cancellation of admission;
- further issue of shares, or repurchase of shares, of the same class as those admitted to the High Growth Segment; or
- severe financial difficulty, including in relation to any associated restructuring, reconstruction or disposal.
Notifiable and Related Party Transactions
Unlike companies with a premium listing, while such transactions must be announced, notifiable transactions and related party transactions will not require shareholder approval.
However, as with premium listed companies, on a reverse takeover of a company whose shares are admitted to the High Growth Segment shareholder approval will be required and the admission of the company's shares will be cancelled (and it must reapply for admission).
In addition to the general requirement to announce "inside information" to the market as soon as possible in accordance with the DTRs, and the requirement to announce significant transactions (as to which, see above), a company whose shares are admitted to the High Growth Segment will also be required to announce without delay:
- the resignation, dismissal or appointment of any director;
- any change in its accounting reference date, registered office address or legal name;
- any decision to make any payment in respect of the shares specifying the net amount payable per security, the payment date and the record date;
- the admission or cancellation of any of its shares;
- any proposed or actual change in its capital structure and the results of any new issue of securities; and
- details of all resolutions passed at a general meeting of the company other than resolutions concerning ordinary business passed at an annual general meeting.
In addition, the company must maintain a website on which the following information in relation to it should be available:
- a description of its business;
- the names of its directors with brief biographical details of each and a description of their responsibilities, and details of any committees of the board of directors and their responsibilities;
- details of its country of incorporation and main country of operation;
- its current constitutional documents (e.g., its articles of association or by-laws);
- details of any other exchanges or trading platforms on which it has applied or agreed to have any of its securities admitted or traded;
- the number of securities in issue (noting any held as treasury shares);
- details of any restrictions on the transfer of its securities;
- its most recent annual financial report and any subsequent half-yearly, quarterly or similar reports;
- the information in relation to corporate governance required by the Rulebook to be included in the company's annual financial report (as to which, see below);
- all notifications to a RIS that it has made in the past 12 months;
- taking into account any restrictions in relation to applicable securities laws, its most recent prospectus together with any circulars or documents sent to shareholders within the past 12 months; and
- details of its key professional advisers (as might normally be found in a prospectus).
To a degree, this reflects the requirement for AIM quoted companies under Rule 26 of the AIM Rules.
Unlike a premium listed company, the company will not be required to "comply or explain" by reference to the Combined Code.
It must, however, include the following in its annual financial report:
- details of the corporate governance code to which the company is subject and/or details of any corporate governance code or practices which it has voluntarily decided to apply;
- a statement as to how it has applied the main principles set out in such code or practices; and
- a statement as to which relevant provisions set out in code or practices it has complied with throughout the accounting period, or where it has not complied with the relevant provisions, an explanation of the same.
This is similar to the requirement for standard listed companies.
Responsibilities of Key Advisers
The Rulebook requires that companies appoint a "Key Adviser" with responsibility for advising them on admission and on certain material transactions (see above).
Firms that want to act as a Key Adviser must be approved by the Exchange. To do so, they must, among other things, be an authorised person that is included on the list of sponsors maintained by the FCA, demonstrate that they are competent to perform the role and have appropriate systems and controls in place to do so.
1 One illustration of this competition has been recent US efforts to attract "emerging growth companies" through the Jumpstart Our Business Startups Act 2012. For more information on the JOBS Act, see http://www.friedfrank.com/siteFiles/Publications/4-3-2012-%20TOC%20Memo-The%20Enactment%20of%20the%20Jumpstart%20Our%20Business%20Startups%20Act.pdf .
2 CP 12/2 (October 2012). See: http://www.fsa.gov.uk/static/pubs/cp/cp12-25.pdf. For more information on those proposals, see: http://friedfrank.com/siteFiles/Publications/10-22-2012-%20TOC%20Memo-%20Proposed%20changes%20to%20the%20UK%20listing%20regime-How%20do%20you%20control%20a%20controlling%20shareholder.pdf
3 See Chapter 8 of the Listing Rules.
4 See Chapter 10 of the Listing Rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.