The United Kingdom left the European Union on 1 January 2020 and the laws of the European Union will continue to apply until the end of a transition period on 31 December 2020. The UK government has consistently indicated that it will not seek any further extension to the transition period. Recent statements made by the prime minister and other senior cabinet ministers indicate that the UK government may not be able to conclude a trade agreement with the EU before the end of the transition period.

Issuers on UK public markets will therefore need to aware of the implications of a no-deal situation and in this article we will highlight some of the key changes coming into effect from the end of the transition period in the event of no-deal. The key takeaways are:

  • 25% free-float requirement in 2021 will be jurisdiction-neutral
  • there are no immediate changes of substance for UK issuers apart from free float
  • EEA issuers on UK markets will need to behave like UK issuers

General approach

In preparation for a no-deal Brexit, the UK government and the Financial Conduct Authority (FCA) has put in place arrangements that will result in the vast body of EU Law being 'on shored' in the UK through the European Union (Withdrawal) Act 2018 (Withdrawal Act) and other secondary legislation. The current prospectus regime, disclosure regime and market abuse regime will largely be unaltered. The new regime will continue to mirror the current legal framework, save for the removal of references to European institutions, EEA states (including 'other competent authorities') and the replacement of UK laws where there are currently references to EU law. 

This provides some clarity for issuers as to what to expect from the end of the transition period in the event of no-deal. Companies with trading operations based in the UK and whose shares are admitted to the Official List will largely be unaffected by such changes and there is no immediate need to overhaul existing contractual policies or governance arrangements. Issuers with a listing or a presence in other EEA member states (particularly with a listing on another EEA market) will be treated in the same way as any other third country, and this means that greater consideration should be given to the potential impact of a no-deal Brexit.

Changes to the FCA Handbook, forms and guidance

The Withdrawal Act and other statutory instruments amending the FCA Handbook will come into effect at 23:00 on 31 December 2020. On 1 October 2020, the FCA published details of the rules that will apply from the end of the transition period. Alongside this, the FCA has published a guide which is intended to provide an explanation to various changes made to the FCA Handbook at the end of the transition period.

The existing forms used by the FCA are not expected to change from the end of the transition period and, consequently, such forms will continue to contain references to EU law and institutions that are no longer applicable. The FCA has published guidance to assist with the preparation of forms, and this includes a table setting out how current EU-terms should be construed and interpreted going forward.  

How will these changes impact the approval of prospectuses?

As from the end of the transition period, EEA issuers will no longer be able to issue securities in the UK on the basis of a prospectus that has been approved by the competent authority in another EEA state. A prospectus relating to the issue of securities in the UK must be approved by the FCA. 

It is currently unclear whether a regime of mutual recognition between the EU and the United Kingdom (and vice versa) will apply following the transition period. In the event that there is no agreed equivalence, this could have a punitive impact on issuers with a listing on another market in the EEA, for instance, a requirement to have a prospectus approved by the FCA and the relevant EEA competent authority. This would result in considerable duplication of effort and deal costs.

Will issuers still be required to follow ESMA guidelines?

Issuers preparing a prospectus in connection with an application for Admission (in particular, specialist issuers such as mining and resource companies) will need to have regard to the ESMA guidelines, recommendations and Q&A documents. As from the end of the transition period, such materials will not be imported into UK law and will therefore not have any special status as from that date.

Nevertheless, the FCA has made it clear that issuers should continue to have regard to relevant ESMA guidance following the end of the transition period. It should therefore be assumed that there will be no relaxation of the requirements applicable to the preparation of a prospectus, save where such requirements are incompatible with the spirit of the amendments made to the current prospectus regime from the end of the transition period.

Will the 'free float' requirement continue to apply to EEA persons?

One of the key difficulties for new issuers seeking admission to the Official List is meeting the 'free float' requirement, which forms part of the basic eligibility criteria. To establish that there is sufficient liquidity in the shares, the Listing Rules requires issuers to demonstrate that at least 25% of the securities are distributed to the public in one or more EEA states. 

As from the end of the transition period, holders from any jurisdiction will be capable of being counted towards the free float and the calculation will therefore no longer be limited to holders from EEA states. The FCA contemplated amending the references from the EEA to the UK, but this was thought to be unduly restrictive and a poor measure for assessing whether there was sufficient liquidity in the securities of an issuer.

The implications for this change could be far reaching and would enable issuers to count holders based in European countries outside the existing EEA block (such as Turkey) and providing issuers with greater access to capital in major markets such as US and China. 

Will there be any changes to the transparency requirements and that hold a notification rules?

DTR 1A and 4 to 6 apply to all issuers with securities traded on a regulated market in the EU and where the FCA is the home competent authority. An issuer whose home state is based in an EEA member state is required to comply with equivalent requirements of the local regime. DTR 5 applies to issuers whose securities are traded on a prescribed market, such as AIM.

As from the end of the transition period, these disclosure requirements will apply to all issuers where their securities are admitted to trading on a UK regulated market. This means that all issuers (regardless of their place of incorporation) will be required to comply with the UK disclosure regime and the exemption currently available to EEA-issuers will cease to apply.

Are there changes impacting the financial reporting requirements of issues?

From the end of the transition period, issuers preparing consolidated accounts will have to use international financial reporting standards (IFRS) as adopted by the UK (UK-adopted IFRS) for all financial years commencing on or after that period. 

HM Treasury has confirmed that issuers can continue to use EU-adopted IFRS on the basis this has met the standard of equivalence with UK-adopted IFRS.

Will an EEA auditor be able to provide an audit report?

As from the end of the transition period, an auditor registered in an EEA state will be treated in the same way as an auditor based in any third country and will be required to register with the Financial Reporting Council (if they have not already done so) to be able to provide an auditors report on future financial statements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.