Three and a half years after Lord Hill’s UK Listing Review was published, the Financial Conduct Authority (FCA) has now published the new UK listing rules (new UKLRs), which came into force on 29 July 2024.
We have set out below a summary of the key changes applicable to closed-ended investment funds below, for which a separate listing category has been maintained (which will still be eligible for inclusion in the FTSE UK Index Series). Please click here for our briefing on the wider listing rule reforms.
Board independence
The new UKLRs clarify that notwithstanding an appointment to the board of more than one closed-ended investment fund that has engaged the same external Alternative Fund Investment Manager (AIFM), a director may still be considered independent provided that the AIFM is independent of the investment fund’s investment manager. This is helpful where two closed-ended investment funds have the same AIFM but their investment managers are outside of their AIFM’s group.
Significant transactions
Broadly speaking, the changes to the significant transactions regime for commercial companies apply to closed-ended investment funds too. This means that no shareholder approval is required except for reverse takeovers (and as previously only where they are outside of the scope of the investment policy). Disclosure (but not shareholder approval) will be required where the transaction is outside of the scope of the fund’s investment policy and is 25 per cent or above the relevant percentage ratios when class tested.
This is a change from the earlier proposal by the FCA which maintained the current position that shareholder approval is required where a transaction is outside the scope of the fund’s investment policy. We note that a closed-ended investment fund must still invest and manage its assets in accordance with its investment policy and requires shareholder approval (as well as FCA approval) prior to making any material changes to its investment policy. Consequently, any material transaction outside the scope of the investment policy will in any event require shareholder approval (to amend the policy).
Related party transactions (RPTs)
The most significant change to the rules on RPTs (applicable to closed-ended investment funds as well as commercial companies) is the change to the definition of “substantial shareholder” where the percentage has been increased from 10 per cent of voting rights to 20 per cent. However, the definition of a related party for a closed-ended investment fund still includes an investment manager and its group members.
Unlike commercial companies, closed-ended investment funds still need to obtain shareholder approval for certain ‘relevant' RPTs, specifically changes to the fees of an investment manager or other remuneration payable in connection with services rendered by an investment manager with a percentage ratio under a class test of more than 5 per cent. (or uncapped fees). A sponsor’s fair and reasonable opinion is required for all ‘relevant’ RPTs with changes of more than 0.25 per cent.
Helpfully, under the wider listing rule reforms the additional related party rules set out in DTR 7.3 (which implemented the Shareholder Rights Directive II) no longer apply to companies that have to comply with the related party rules under the Listing Rules. This removes the parallel regime which, for example, had a slightly wider definition of a ‘related party’.
Board confirmation and compliance with Listing Principles
The FCA has introduced a requirement for all listing categories that the board confirm on an IPO that the company has taken reasonable steps to establish adequate procedures, systems, and controls to enable it to comply with its obligations arising from the listing rules, disclosure requirements, transparency rules and corporate governance rules, which is effectively a confirmation that the company can comply with Listing Principle 1 (LP 1). Directors on an IPO (particularly non-executive directors) will need to ensure that they are comfortable giving the confirmation direct to the FCA and that all necessary due diligence has been done to be satisfied this is the case. Whilst the confirmation does not really change the directors’ obligations, the requirement to sign a document and provide it directly to the FCA will undoubtedly focus directors’ minds.
The FCA has also now included guidance to LP 1 stating that directors should take reasonable steps to ensure that adequate governance arrangements are established and maintained at all times to enable the company to comply with LP 1.
The new guidance together with the new board confirmation confirms the messaging from the FCA in the consultation papers that the FCA is placing greater emphasis on directors taking collective responsibility for compliance with the rules relating to procedures, systems and controls.
Key contacts and service of notices
The new UKLRs require all issuers (including closed-ended investment funds) to provide contact details for at least two directors who will be key persons able to assist the FCA regarding matters that require an urgent response. These details must include their name, business telephone number and business email address. In the case of a company like a closed ended investment fund that does not have executive directors, the two directors may be non-executive directors. In addition, there is a new requirement for all issuers (including closed-ended investment funds) to provide up-to-date contact details of a nominated person at the issuer, including their address for the purposes of receiving service of certain documents.
These new provisions do not apply to existing listed closed-ended investment funds until 30 January 2025.
