UK Listing Rules Reforms: Companies facing financial difficulty

For more information about these reforms and their impact on existing and prospective issuers, please see our transactions blog series.

In this blog we highlight the main changes to the UKLR that are relevant to companies experiencing financial difficulty. These include:

• the application of the new significant transaction regime to reconstructions or refinancings, which includes the removal of the requirement for shareholder approval of ‘significant’ or ‘related party’ transactions;
• updated and simplified requirements for disclosures relating to reconstructions and refinancings, including no longer requiring an FCA vetted circular or the appointment of a sponsor;
• increased flexibility around dual class share structures (DCSS) which allow for the issue, prior to IPO, of enhanced voting rights shares, which could significantly alter the shareholder dynamics in the context of a restructuring of a listed company with a DCSS; and
• the removal of the 1% market cap on break fees, impacting what could be negotiated in the context of distressed M&A.

The changes made to the UKLR will mean that, going forward, some procedural hurdles that used to be required to restructure listed companies in financial distress are removed. Despite this, the increased flexibility around DCSS, and the de facto removal of the 1% cap on break fees for M&A (including distressed M&A), may have the unintended consequence of resulting in more expensive and more complex restructuring transactions.

Removal of requirement for a shareholder vote on ‘Significant’ or ‘Related Party’ transactions

Where a transaction is undertaken by a company facing financial difficulty, the new significant transaction regime will apply. ‘Financial difficulty’ is not defined in the UKLR, and there is no FCA guidance elaborating on the concept. As such, it could potentially cover both moderate cases requiring standard refinancings, or severe financial distress where a company is insolvent and liquidation or administration is likely. Under this updated significant transaction regime, no prior shareholder vote or shareholder circular will be required for a ‘significant transaction’ (i.e. a transaction where any one class test ratio is 25% or more (what used to be known as a ‘Class 1’ transaction) – such as a large disposal to raise finance) or a ‘related party transaction’. Shareholder approval will still be required for reverse takeovers and delistings. However, the removal of such requirements does not exclude UK MAR obligations, so listed companies will still need to be conscious of their disclosure obligations. Updates to guidance on selective disclosures in DTR 2.5.7G make it clear that shareholders can still be consulted about proposed transactions, even where a shareholder vote is not required.

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