The Financial Services Authority (FSA) has also proposed to clarify the rules on the amount of 'free float' a company needs for premium listing. 'Free float' requirements, referring to the proportion of a company's shares that are publicly tradable, are set at an EU level; however, the FSA can consider a free float below the current 25% requirement where there is sufficient liquidity.
The proposals have been backed by the Financial Reporting Council (FRC), which is responsible for the UK Corporate Governance Code, and share index FTSE. They follow a consultation earlier this year on the 'premium' listing regime, available to companies that meet the highest standards of regulation and corporate governance, as well as "market debate" on the issues following a number of cases in which private companies managed to bypass the lengthy listing process through a 'reverse takeover' of a listed public company.
"We believe that these proposals will strengthen the investor protections afforded by the Listing Regime, particularly for companies with controlling shareholders," said David Lawton, the FSA's director of markets. "Of course, it is primarily the responsibility of shareholders to use these new provisions effectively."
The Listing Rules is a standalone set of rules covering the behavioural and governance obligations that companies must meet before they can list shares on the Official List. The FSA, as the UK Listing Authority (UKLA) has overseen the rules since 2000 and carries out periodic reviews.
Listings can be either premium or standard, each of which carries different governance requirements. Standard listings need only meet EU harmonised standards while premium listing, which is only available to equity shares issued by trading companies and closed and open-ended investment entities, has its own 'super-equivalent' rules which are of a higher standard. Only premium listed companies are eligible for inclusion on the FTSE UK Index series, including the FTSE 100.
In its consultation on the changes, the FSA made it clear that "certain types of company" – including those with voting arrangements that have the potential to subvert or circumvent the investor protections attached to premium listings - were "incompatible" with this status. Where a low number of shares in a particular company are held in public hands, it suggested, a single dominant shareholder can exert effective control over that company's decisions.
"The FSA believes that investors play a very important role in holding companies to account," the announcement said. "An important function of the Listing Rules is to ensure that investors have the tools to exercise this influence and ... the effectiveness of these tools will be diminished if investors choose not to exercise their stewardship responsibilities."
The regulator ruled out mandating an increased free float requirement for premium listed companies, saying that it did not believe that such an increase was a "proportionate way to address the governance issues that have been raised in this context". Instead, it will set out the circumstances where it might consider modifying the existing 25% requirement for premium listings while indicating that it would be "unlikely" to reduce the requirement below 20%. It will remove the requirement for a "minimum absolute percentage" for a company to obtain a standard listing, instead providing that the company must be sufficiently liquid.
The consultation also proposes introducing the concept of a 'controlling shareholder' where such a person exists; requiring an agreement to be put in place to regulate the agreement between that person and the company and ensuring that this agreement is complied with on an ongoing basis. This would, the FSA said, ensure that the company was "managed independently from that shareholder". In addition, the new rules provide that where a controlling shareholder exists, the company's board should be made up of a majority of independent directors. A new dual voting procedure will allow independent shareholders to have more say in the appointment of these directors.
Last month the Government announced changes to the Listing Rules which could see companies be permitted to 'float' a smaller proportion of their shares. The proposals would, it said, encourage "European mid-sized high-growth businesses" - particularly internet and technology companies - to make an initial public offering (IPO) of shares in the UK. However, the National Association of Pensions Funds warned that such a move would damage the markets and investors' interests and said that the Alternative Investment Market (AIM) would be a more suitable market for such companies.