The new UK Listing Rules – implications for closed-ended investment funds

Update 1: Significant transactions

The UKLR retain the exemption from compliance with the significant transaction rules where a transaction is in accordance with the scope of the fund’s investment policy.

Shareholder approval is required only for a reverse takeover that is outside the scope of the investment policy.

The significant transaction rules otherwise move towards a disclosure-based regime, with a reduced requirement for a sponsor to be appointed. The disclosure requirements apply to a significant transaction which is outside the scope of the fund’s investment policy and where a percentage ratio is 25% or more.

Our thoughts: We are pleased to learn that the FCA intends to publish technical guidance to clarify that a transaction within the scope of a closed-ended investment fund's published investment policy includes the acquisition or disposal of another entity the sole purpose of which is to hold assets that fall within the scope of the closed-ended investment fund's published investment policy. This clarifies the previous position, which the FCA sometimes took as a point of discussion on takeovers, where the acquisition would be of a company holding assets in line with the investment policy.

Update 2: Related party transactions

The threshold at which a shareholder becomes a related party has increased from 10% to 20% but the definition of a related party otherwise remains the same and continues to capture an investment manager and members of its group.

Shareholder approval for a related party transaction will only be required for any transaction where a percentage ratio is 5% or more and which relates to the fees or other remuneration payable by a closed-ended investment fund in connection with services rendered by an investment manager or a member of the investment manager’s group (a "relevant related party transaction").

A sponsor’s fair and reasonable opinion will be required, and specific disclosure requirements apply under the UKLR, for relevant related party transactions where a percentage ratio is more than 0.25% and for any other related party transactions where a percentage ratio is 5% or more.

Our thoughts: In our experience, amendments to an investment manager’s management or performance fees or other remuneration will likely be capped or result in a percentage ratio below 5% and so the requirement for shareholder approval for a relevant related party transaction is unlikely to be triggered frequently in practice.

The relaxation of the rules on related party transactions may open the door to certain transactions between a listed fund and its investment manager where obtaining shareholder approval was previously seen as a hurdle. Boards of listed funds will still need to consider the benefits of such a transaction and, with or without financial advice, conclude that such a transaction is in the best interests of the fund and its shareholders.

Update 3: Board independence

In response to specific feedback, the UKLR clarify that, where a closed-ended investment fund has an external AIFM which has delegated portfolio management to another investment manager who is not in the same group as the external AIFM, the fact that a director of the closed-ended investment fund is also the director of another investment company or fund that is managed by the same external AIFM (or member of its group) does not prevent that director from being regarded as independent for the purposes of the UKLR.

Our thoughts: While this update is in relation to a specific circumstance, it is helpful that the UKLR clarify the position.

Conclusion

In addition, the new UKLR removes the restriction on the number of shares a listed company can have under option. Previously a listed investment company could not have more than 20% of its issued share capital under option, hence the typical "1 for 5" subscription share or warrant issues. This restriction has now been removed meaning that investment companies could consider a higher proportion of shares under option. However, the effect on the ordinary share price by reason of such higher proportion should be considered.

Overall, although there have not been significant changes for closed-ended investment funds, the UKLR have removed certain obstacles for such companies to proceed with transactions.

Perhaps of greater interest to closed-ended investment funds and their advisers will be the forthcoming changes proposed to the prospectus regime and the circumstances in which a prospectus will, or will not, be required for secondary issuances. The FCA’s consultation paper on this is expected to be published later this year.

If you have any questions about the UKLR and how they may affect you, please feel free to get in touch with your usual SH contact or via: SHCapitalMarkets@shlegal.com.