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FOCUS ON… LISTED COMPANIES |
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An overview of the market rules for listed companies
A single market in financial services has been a long term goal of the EU. The benefits include increased economic growth, and lower cost and better quality financial products for consumers and businesses. As part of this, EU legislation has been passed since 2003 under its Financial Services Action Program to unify the regulation of financial markets throughout the Community. The process of implementing this legislation in the UK began in 2004 with the Market Abuse Directive. Stocks and shares are traded in the UK through the London Stock Exchange (LSE). It has had it own sets of rules for almost 200 years, which have evolved to suit changing circumstances over the years. The principal purpose of these rules is to prevent investors being cheated by those offering for sale shares and other financial instruments, which are referred to collectively as “securities”. Further changes to these rules have been brought in over the last 4 years as a result of the new EU legislation. The relevant rules are now not just the basic rules, that is the Listing Rules, but also the Prospectus Rules, and the Disclosure and Transparency Rules. The LSE is no longer self-regulating, as all financial services in the UK are now controlled by the Financial Services Authority (FSA). The rules are drafted by the FSA and are all contained in the FSA Handbook, available on its website http://www.fsa.gov.uk/, on CD or as hardcopy. The FSA is the competent authority for listing in the UK. The section of the FSA which deals with this role is called the UK Listing Authority (UKLA). The UKLA drafts the rules and polices them. The FSA Handbook contains not only the rules mentioned above but also general standards for all financial services providers.
The various rules deal with different aspects of listed companies. The Listing Rules contain the listing principles, rules and guidance on the obligations of listed companies and of sponsors, i.e. the third parties responsible for compliance with the rules in each issue of securities. The rules make much use of the term “issuer”. This is the legal business that develops, registers and sells securities for the purpose of financing its operations. Perhaps the most typical issue of securities is that of a company offering its own shares or bonds. Strictly speaking, the words “quoted” and “listed” should be used in different senses but are in fact used interchangeably. On the LSE, shares which are on the main market are defined as being listed but not quoted, and shares listed on AIM or PLUS are quoted but unlisted (the different UK markets are discussed below). Quoted or listed companies also have to abide by the rules of their particular market.
The Prospectus Rules contain rules and guidance on the obligation to publish a prospectus, its contents and approval by the FSA. A prospectus is a document detailing the benefits and risks of investing in the relevant company, shares or other financial instrument in question. The Transparency Rules concern the regular provision to investors of financial information about listed companies. The Disclosure Rules control provisions on the disclosure of “inside information” and on manipulating the market, usually to increase the share price. Insider trading is an offence because an individual can make a personal profit out of his access to sensitive financial information which is not available to the public.
The UK markets There are various markets in the UK, tailored to different types of company and securities. They are all regulated by the FSA. There are about 1300 companies listed on the LSE’s “main market”. There is a similar number quoted on the Alternative Investment Market (AIM), which is LSE’s market for smaller companies. A smaller number of companies are quoted on the PLUS market (this used to be called OFEX, the off-exchange market because it is separate to the LSE). The companies on all of the markets are public companies and so must also comply with the Companies Acts 1985 and 2006. The Listing Rules apply to the main market but not to shares which trade on AIM or PLUS. The character of the London markets has changed since 2000, in that many more securities from emerging markets are being offered. During Gordon Brown’s recent trip to the Far East, the LSE announced that it was opening an office in Beijing, presumably to make it easier for Chinese companies to list their securities in London. Other UK markets include the LSE’s professional securities market. The securities on this market are offered to buyers in high minimum denominations, or marketed only to qualified investors, i.e. usually financial institutions. There is no need to publish prospectuses on this market.
Admission to the LSE’s main market is a two-stage procedure. Firstly, the securities need to be admitted to the Official List by the FSA, or rather by its relevant division, the UKLA. Secondly, the securities need to be admitted to trading by the LSE. Higher standards are imposed in the UK on a primary listing of equity securities (shares and similar products) on the LSE main market. The FSA sees such a listing as the premium brand of the London markets. The FSA’s objectives in managing the regulated markets are to: » provide an appropriate level of protection for investors in listed securities; » facilitate access to listed markets for a broad range of enterprises; and » seek to maintain the integrity and competitiveness of the UK market for listed securities.
Overview of the Listing RulesThe Listing Rules deal with the following key areas in regulating the LSE’s main market: » the six listing principles; » the eligibility criteria for listing; » the listing application process; » rules regarding sponsors; » the cancellation and suspension of listing; and » a listed company’s continuing obligations (along with obligations in the Disclosure and Transparency Rules, and in the Prospectus Rules). The Listing Principles were introduced in 2005 as part of a revamp to ensure that the spirit, as well as the letter, of the Listing Rules was observed by listed companies. It is intended that they should work in the same way as the general principles in the City Code on Takeovers and Mergers (see CLM ¶6685+). The Listing Rules themselves are to be interpreted in the light of the Listing Principles. The FSA handbook gives guidance on the application of the listing principles. As with all listing matters, queries can be directed to the FSA helpdesk on 020 7066 8333. Breach of the Listing Principles, as with any of the Listing Rules, can lead to sanctions by the FSA (see below). The Listing Principles are as follows: » A listed company must take reasonable steps to enable its directors to understand their responsibilities and obligations as directors. » A listed company must take reasonable steps to ensure that it complies with all its obligations. This is a wide ranging obligation. The FSA said that this principle is restricted to the obligations of a listed company under the Listing Rules and Disclosure Rules. It does not extend to other matters such as controls within a company to comply with the Combined Code, which is a voluntary standard of good corporate governance. » A listed company must be honest with its shareholders and potential shareholders. Behaviour which would fall foul of this Listing Principle would include deliberately misleading shareholders. » A listed company must not release information in such a way as to manipulate the share price. Being reckless in giving or not giving information to shareholders could be a breach of this principle. » A listed company must treat equally all holders of the same class of its shares who are in the same position, e.g. allowing for different countries of residence. » A listed company must deal with the FSA in an open and co-operative manner. In deciding the level of any penalty for breach of the Listing Rules, the FSA will take into account the level of co-operation from the party concerned.
The Prospectus RulesThe Prospectus Rules come from the EU Prospectus Directive which seeks to harmonise standards of prospectuses across the stock exchanges of the EU. The idea is that a prospectus which is approved by a regulatory authority in one member state can be used for public offers and admissions to trading on regulated markets throughout the EU. This has been referred to as the “European passport”. Not all member states have implemented the directive, as yet. The Prospectus Rules do not cover the eligibility of a company for listing. This is dealt with by the Listing Rules. The Prospectus Rules apply where a company is seeking to offer its securities to the public in the UK, or where a company is seeking to have its securities admitted to a UK-regulated market. Thus, the rules apply to both the LSE’s main market and to other markets such as AIM and PLUS. A prospectus needs to be approved by the FSA or by the equivalent regulatory body in another member state under the European passport provisions. Listing particulars used to be needed to obtain listing on the LSE. They are now only needed for securities which have not triggered a prospectus requirement, and so are becoming much less common than they used to be. An example of such a case would be securities offered in connection with a takeover or merger, or an offer to employees. The Prospectus Rules replace both the detailed requirements of the listing particulars, which were previously set out in the Listing Rules, and the now defunct Public Offers of Securities Regulations 1995 (known as the POS Regs).
The Disclosure and Transparency RulesThe Disclosure Rules are intended to prevent insider dealing and market manipulation. This is where people in the company, or their advisers and contacts, use knowledge of the company’s financial position to make a personal profit for themselves or others. This includes taking action that produces an artificially high, or low, share price. The rules set out the continuing obligations of a listed company to: » inform the market about new developments, the financial condition of the company, its performance, inside information; and » disclose transactions in securities by directors, senior executives and persons connected to them (known collectively as “persons discharging managerial responsibilities”). Also relevant to the prevention of insider dealing are the Code of Market Conduct and the Model Code.
The Transparency Rules are intended to improve investors’ access to information about companies trading on the UK financial markets, in order to assist them in making investment choices. These rules require more financial information to be revealed more frequently than was previously the case. One aspect is the requirement to disclose information about significant shareholdings in listed companies, so that the company is aware at an early stage of any attempts to mount a takeover. The Transparency Rules are the UK implementation of the Transparency Directive. The final implementing measures for the Transparency Directive have been passed at EU level in March 2007 and are due to be implemented in the UK by March 2008. These include the disclosure in management reports of major transactions by a related party and the minimum standards for the dissemination of regulated information. A European Commission recommendation in October 2007 called on member states are to examine ways of linking their national information systems. The idea is that a search on the interface system would direct the enquiry to the relevant national system for that company, where the information would be held. This is still some years away.
Punishment for Breach of the RulesThe FSA can impose punishments for breach of the rules on private individuals, companies, directors or former directors and on the securities themselves. This takes the form of a financial penalty and/or public censure. This is laid out in the Decision Procedure and Penalties Manual, which is part of the FSA Handbook. For a breach of the Transparency Rules only, the FSA can suspend or prohibit trading on the main market of a listed company’s shares. Breaches of any of the rules can also give rise to civil and criminal liability. The attitude taken by the FSA toward enforcement is set out in its enforcement guide, introduced in August 2007 and available at: http://www.fsa.gov.uk/pubs/policy/ps07_12.pdf.
The future of the Listing Rules An FSA discussion paper was published in January 2008, “A Review of the Structure of the Listing Regime”, available at http://www.fsa.gov.uk/pubs/discussion/dp08_01.pdf. It only deals with the problems of the Official List of the LSE, and not with AIM or PLUS. Among the matters where views are being sought are: » Should the FSA’s higher standards, i.e. above the minimum set out in EU law, be retained for primary listing on the LSE? For example, should the requirements for corporate governance and pre-emption rights be retained? » Should the FSA continue to set these higher standards or should it be left to the market, i.e. exchanges, trade associations or other independent bodies? » Should UK companies be allowed to have a secondary listing? » What standards should apply to overseas companies with a primary listing on the LSE main market? » Should a sponsor be required for transactions involving issuing global depositary receipts? Responses should be submitted to the FSA by 14 April 2008. Further information on this topic can be accessed from the FL Memo appendix on market rules which is available on our web site.
Recent EU legislation on financial markets
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