New UK listing rules: Implications for London listed investment companies

The revised UK Listing Rules sourcebook (the ‘‘UKLR”) came into force on 29 July 2024 and replaces the existing Listing Rules in their entirety. The FCA’s stated aim for the UKLRs is to create a more accessible UK listing environment with a simpler, disclosure-based regime to facilitate growth and enhance competition.

New listing categories

The new UK Listing Rules adopt a simplified single listing regime for operating companies. The previous two-tier premium and standard listing category structure is abolished, with all operating companies which previously had a premium or standard listing instead falling into a new single category, the Equity Shares (Commercial Companies) (ESCC) category.  The impact on operating companies is discussed in our separate article.

Closed-ended investment funds which previously had a premium listing under Chapter 15 of the Listing Rules retain their own distinct, eponymous, listing category in a new Chapter 11, although the ‘premium’ label no longer exists.

The existing separate category for open-ended investment companies also remains, along with three new listing categories: for shell companies; secondary listings for international commercial companies; and a transitional category.

How will the changes to the UK Listing Rules affect London-listed investment companies?

Overall, the impact of the UKLRs on London-listed closed-ended investment funds is limited compared to the impact on operating companies. The FCA confirmed at an early stage that the current review would not seek to change the substance of the existing rules in respect of investment companies.

Accordingly, the new closed-ended investment fund rules largely retain the same eligibility requirements and continuing obligations as before. These include the requirement for FCA and shareholder approval for material changes to investment policies, and the other bespoke rules, carve-outs and exemptions in respect of investment companies have been left broadly untouched.

That said, there are a number of important rule changes of which listed investment funds and their investment managers should be aware

Related Party Transactions

The related party transaction regime has seen significant changes. Under the new regime:

• The requirement for an FCA-approved circular and shareholder approval for related party transactions not involving a company’s external investment manager or members of its group has been removed. These changes were not initially proposed by the FCA, but appeared in the final rules in order to align the position for closed-ended investment funds more closely to the new rules for commercial companies in order to avoid an undesirable arbitrage. Instead:

• • For large related party transactions (being at least 5% on any applicable class test), issuers must announce certain prescribed information about the transaction to the market and obtain a “fair and reasonable” opinion from a sponsor.

• • All disclosure requirements for smaller related party transactions (sub-5% on all applicable class tests) have been removed, and specific market notifications and “fair and reasonable” opinions are no longer required.

• Shareholder approval will be required for any increase in fees or other remuneration payable to an investment company’s external investment manager or other members of the investment manager’s group if the size of the increase means that any class test is 5% of more.  The new rules do not expressly address whether changes to an investment management agreement that could indirectly increase fees, such as adoption of a longer notice period for termination of an investment manager’s appointment, will be subject to this requirement, although it would be consistent with prior practice if the FCA takes that approach. Unlike the prior rules, the revised requirement for shareholder approval does not expressly prohibit the relevant related party (i.e. the investment manager) and its associates from voting on the relevant resolution. 

• All related party transactions (not just relating to fees) involving the investment manager or other members of its group (other than very small transactions that are less than 0.25% on any class test) will require a sponsor’s "fair and reasonable" opinion. Joint investments and sales of assets to and from the investment manager may be caught by this requirement. 

• The threshold at which a shareholder becomes a “substantial shareholder”, and therefore a related party, has been increased from 10% to 20% of voting rights of the issuer, meaning that fewer transactions may be subject to the new related party rules.

The class tests for these purposes are the same as those which applied under the previous Listing Rules, save that the ‘profits test’ has been removed from the revised UKLRs, so will no longer be used to determine treatment of a related party transaction.

Director independence

The new UKLRs confirm that where an investment company has a “host” AIFM, a director of that company who is also a director of another investment company with the same host AIFM (or another company in the same group as that AIFM) will be regarded as independent for the purposes of the UK Listing Rules, so long as the director and the host AIFM are both independent of the investment manager to whom the host AIFM has delegated portfolio management of the investment company.

This is a new exception to the existing rule that a director who serves on the boards of two or more companies with the same underlying portfolio manager will not be considered independent in respect of those investments companies and is a welcome change for directors serving, or wanting to serve on the boards of companies using the same host AIFM service provider. 

Sponsor regime

The previous sponsor rules have been broadly retained, albeit in a modified form. On an IPO, a sponsor is still required prior to admission to assess and provide assurances to the FCA that an applicant has met the listing and prospectus requirements. However, the sponsor’s ongoing role has been reduced somewhat under the UKLRs, and there are fewer instances where an issuer will be required to engage a sponsor.

Under the new rules, the sponsor’s role post-admission will be primarily confined to:

• large related party transactions, and related party transactions involving material changes to investment manager  fees and remuneration, where a sponsor must give a “fair and reasonable opinion”;

• where an issuer wishes to seek individual guidance from the FCA, or a modification or waiver from the UK Listing Rules; and

• transactions involving new share issuances that require a prospectus.

In this context, issuers should bear in mind the impact of the Public Offers and Admissions to Trading Regulations (POATRs), which set out a framework for replacing the existing UK Prospectus Regulation Rules. The FCA is currently consulting on new prospectus rules, which will dovetail with the new UK Listing Rules. It is currently proposed that issuers will still be required to publish a prospectus in connection with their IPO, but that the threshold for triggering a prospectus for further issuances would increase from 20% of existing fungible securities, to 75%.

Practical points to note

The process of migrating to the new listing category is automatic, and investment companies which previously had a London premium listing have been transferred to the new closed-ended investment funds category with effect from 29 July 2024.

Although the new UK Listing Rules applicable to investment companies remain in large part substantially similar to the prior rules, the format and numbering of the Listing Rules has changed considerably meaning, from a practical perspective, that all documents referencing the Listing Rules (even those which do not contain substantive descriptions of the rules) will need to be updated for accuracy.

For most investment companies this is likely to impact half-year and annual results and other publications (factsheets, key information documents and website disclosures) which refer to the company’s listed status and/or regulatory compliance – although there is no need to go back and update historic documents. Investment companies and their advisers should review websites and publicly available information for references to the company’s listing category and/or specific Listing Rules and update these where relevant to refer to the new UKLRs. Steps should also be taken to ensure that upcoming interim and final year reports and accounts include the correct references to listing categories and rules.

FTSE indexation

FTSE Russell (which administers the FTSE UK Index Series) has confirmed that shares listed in the closed-ended investment fund category (alongside those in the ESCC category) will be eligible for FTSE UK Index Series inclusion, replacing the premium segment for these purposes.

What about companies listed on the London Stock Exchange’s Specialist Fund Segment ("SFS")?

Shares listed on the SFS are not admitted to the Official List and are not directly subject to the Listing Rules or enforcement action by the FCA. Accordingly, investment companies listed on the SFS are not directly affected by the changes to the UKLRs.

However, many SFS-listed companies comply with certain of the Listing Rules voluntarily (typically on the basis set out in their IPO prospectus). Where issuers have previously agreed to comply with Listing Rules which have been modified in the UKLRs (e.g. the related party rules) we anticipate that shareholders are likely to expect that SFS issuers will in future comply with the equivalent UK Listing Rule, rather than requiring over-compliance.

On that basis, SFS-listed issuers should familiarise themselves with the changes to the Listing Rules and consider the extent to which such changes are relevant in the context of any statement of voluntary compliance or other commitments which they may have made and whether those statements or commitments should be updated.

Next steps

If you would like to discuss any of these changes, please do get in touch with your usual contact at Hogan Lovells or one of the listed contacts.

Authored by James Alder, Jonathan Baird, and Erik Jamieson.