Proposed changes to the requirement for shareholder approval for class 1 transactions under the Listing Rules

The CLLS and Law Society have supported the FCA’s proposal to reform equity listing rules including by the creation of a new single equity segment for commercial companies (ESCC) and the removal of the existing requirement for premium listed companies to seek shareholder approval for Class 1 transactions.

This should make UK listed companies more competitive in M&A auction processes. However, the current proposals would appear to be less onerous than the current AIM regime for significant transactions. It remains to be seen whether there will be a corresponding change to the AIM rules.  

Current rules

Currently the listing rules require premium listed companies to send an explanatory circular to shareholders and seek prior shareholder approval by ordinary resolution for a transaction which is classified as a Class 1 transaction under the class tests set out in Listing Rule 10. Class 1 transactions are transactions in which the ratio exceeds 25% in any of the following four tests:

  • Gross Assets Test: Gross assets the subject of the transaction divided by the gross assets of the listed company
  • Profits Test: Profits attributable to the assets the subject of the transaction divided by the profits of the listed company
  • Consideration Test: Consideration divided by the aggregate market value of all the ordinary shares (excluding treasury shares) of the listed company
  • Gross Capital Test: Gross capital of the company or business being acquired divided by the gross capital of the listed company

Transactions which are above 5% on any class test but below 25% on each of them are currently classified as Class 2 transactions and only need to be notified to a RIS.

Proposed changes

The proposed changes under the ESCC would effectively bring transactions which are currently classified as Class 1 within the compass of the current Class 2 requirements so that they would only require notification to a RIS. Current Class 2 transactions would no longer require notification to a RIS. This will reduce the costs of undertaking a significant acquisition or disposal as an explanatory circular and working capital statement will no longer need to be prepared. It should  also make UK listed companies more competitive in M&A auction processes as UK listed companies will no longer be required to make their offer conditional on shareholder approval. Previously, the required conditionality was perceived as putting UK listed companies at a disadvantage in comparison to companies which were not subject to the Listing Rules.

Interaction with the AIM regime

The current proposals appear to make the current AIM regime for significant transactions more onerous than the one proposed under ESCC. Under the proposed ESCC rules an announcement will only be required for transactions above 25% in any class test, whereas under AIM Rule 12 an announcement will be required above 10%. Equally the new regime will have no equivalent to AIM Rule 15 which requires shareholder consent for any disposal which exceeds 75% in any of the class tests. Whether this remains the case, or whether this will elicit a change to the AIM Rules by the LSE remains to be seen.

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