Friday, October 05, 2012

UK FSA Proposes Changes to Listing Rules to Ensure Company Independence from a Controlling Shareholder

The UK Financial Services Authority proposes to enhance the Listing Regime by adopting greater corporate governance requirements for companies with a dominant shareholder.  The FSA proposes to increase the tools available to independent shareholders to influence the governance of the companies in which they have invested, including requiring an agreement to regulate the relationship between a controlling shareholder and the listed company and ensuring that this agreement is complied with on an ongoing basis in order to ensure that the company is managed independently from that shareholder.  
The relationship agreement must contain provisions ensuring that transactions and relationships with a controlling shareholder are conducted at arm’s length and on normal commercial terms. Also, a controlling shareholder must abstain from doing anything that would have the effect of  preventing a company from complying with its obligations under the Listing Rules. In addition, the relationship agreement must provide that  a controlling shareholder cannot influence the day to day running of the new company at an operational level or hold or acquire a material shareholding in a significant subsidiary.
The FSA also proposes to require additional disclosure in the annual financial report under which the directors state that the listed company has complied with the relationship agreement throughout the financial year. If the company has not complied with the relationship agreement, the directors would have to include a description of the provisions of the relationship agreement that the company has not complied with that enables shareholders to evaluate the impact of the non-compliance on the company, along with a confirmation that the UK Listing Authority has been informed.
Recognizing the important role that independent directors play in these circumstances, the FSA would require a majority of independent directors on the board when the company has a controlling shareholder and introduce a new dual voting procedure to allow independent shareholders to have more say in directorial appointments.
The FSA took responsibility for the UK Listing Regime in 2000, and since then has reviewed the Listing Rules on a regular basis. The last review in 2008-10 introduced the premium and standard segments in order to provide greater clarity for investors. 
The FSA now clarifies that certain types of company are incompatible with a premium listing, including those with voting arrangements that have the potential to subvert or circumvent the investor protections that the premium listing provides.
Generally, the FSA endorses the comply or explain approach embodied in the UK Corporate Governance Code.  But the FSA also recognizes that an effective framework for securing the high standards of behavior required within the premium segment needs to accommodate situations where disparate shareholders are less able to exert influence on an issuer’s governance.  This is particularly so where the low number of shares held in public hands means that a single dominant shareholder can exert effective control over an issuer’s decision making. In these situations, the FSA believes that there is a case for incorporating into the Listing Rules some requirements for Premium issuers that are at present subject only to the Code’s comply or explain provisions.