REITS REAL ESTATE INVESTMENT TRUSTS The Listing Rules Chris Luck, Nabarro LLP As at 1 April 2008, 18 companies have either converted to or have listed as UK-REITS. This article considers how to convert an existing listed property company to a UK-REIT and how to list a new UK-REIT on the London Stock Exchange s Main Market. A UK-REIT must be a company which is listed on a recognised stock exchange. This will mean listing its ordinary shares, although a UK-REIT is also permitted to have non-voting fixed-rate preference shares. The definition of a recognised stock exchange is given in section 841 ICTA 1988. It includes, in addition to the Exchange, a number of other exchanges. A list is available from HMRC, but it should be noted that this list does not include AIM. Converting an existing listed property company There is no requirement for an existing listed property company to re-list in order to become a UK-REIT. It will, however, be likely to seek to amend its articles of association in order to introduce provisions to protect itself against a tax charge under the UK-REIT regime (as a result of paying dividends to a 10 per cent shareholder). The British Property Federation has developed a template circular for these aspects and the approval process for a circular following this form has been discussed with the United Kingdom Listing Authority (UKLA). The UKLA is a name used by part of the Financial Services Authority (FSA) in connection with the Listing Rules and other related functions. Listing in London A London listing requires the shares of an applicant to be admitted to the Official List by the UKLA. A separate application will be required for admission to trading on the London Stock Exchange s Main Market. The listing process In order to list a UK-REIT, the following steps should be considered: appointing advisers and a sponsor complying with the UK listing requirements obtaining property valuations availability of accounting information valuations preparing a prospectus submitting documents to the UKLA verification road shows pricing and distribution of shares to the public obtaining the listing and trading commencing on the Exchange satisfying the UK-REIT regime conditions. A timetable can then be prepared for preparing and submitting documents to the UKLA and the Exchange for approval, listing and admission to trading on the Main Market. Property Investment from a wider perspective.
Legal requirements When listing a UK-REIT in London, a number of rules and requirements apply, particularly: the Listing Rules the Prospectus Rules the Disclosure and Transparency Rules. These rules implement certain European Directives, including the Transparency Directive which relates to periodic financial reporting and major shareholding notifications. They form part of the FSA Handbook. Requirement Property company Has been in existence for at least three years and earned revenue throughout that period Yes No Has a market capitalisation of 700,000 at listing Yes Yes Where it has accounts, these are unqualified Yes Yes Has sufficient working capital for the first 12 months of listing Yes Yes At least 25 per cent of listed shares to be in public hands Yes Yes Has control over the majority of its assets Yes No Property Investment Fund The Listing Rules govern the criteria for admission to the Official List, as well as continuing obligations for listed companies and rules for sponsors. The Prospectus Rules govern the requirements of a Prospectus. The Disclosure and Transparency Rules govern the disclosure of information and further continuing obligations. The rules are available on the FSA s website: www.fsa.gov.uk. All companies issuing securities will be expected to comply with the listing principles set out in the Listing Rules. These relate to the responsibilities of the directors, systems and controls, and treatment of and communication with shareholders. These requirements are in addition to those of the Exchange for admission to trading and to general company and securities law, including Part VI of the Financial Services and Markets Act 2000, as amended (FSMA). In addition, the issuer will need to be in a position to give notice to HMRC that it satisfies the requirements for becoming a UK-REIT. New listings Currently, under the UKLA s Listing Rules, a UK company seeking a listing will either have an existing business with a track record, or be a fund which is to be listed as a closedended investment fund. Existing businesses will follow Chapter 6 of the Listing Rules. Closed-ended investment funds will use Chapter 15. The application The application for listing can be found on the UKLA section of the FSA s website (see URL below left) and must be accompanied by a number of documents, including the approved prospectus and a copy of the board resolution allotting the shares. A fee will also be payable. A sponsor, which has been approved by the FSA, will need to be appointed for the application for admission to listing. The sponsor will assist the applicant with the listing process and confirm compliance with the Listing Rules to the UKLA. Requirements Companies will need to satisfy a number of key requirements relating to their status, shares, business record and management. These differ according to whether the company is a property company with a three-year track record, or is seeking a listing as a closed-ended investment fund which specialises in property investments (referred to below as a property investment fund ). A brief table showing certain key requirements is set out above. The issuer The general requirements under the Listing Rules for an issuer apply to both a property company and a property investment fund and include: the issuer must be duly incorporated and acting in accordance with its constitution; the shares to be issued must be duly authorised and validly issued; the shares must be admitted to trading on a Recognised Investment Exchange s market for listed securities (eg the Main Market of the London Stock Exchange); the shares must be freely transferable; the shares must be fully paid and free from liens and restrictions on transfer (except as a result of permitted company ownership investigations);
the expected market value of the shares must be at least 700,000 (a higher value is likely in practice); the whole class of its ordinary shares must be listed; a prospectus must be approved by the UKLA and published. The UKLA can grant some exemptions and also impose special requirements to protect investors. In some cases a prospectus will not be approved by the UKLA, but will instead be approved by the relevant authority in another EEA state. Property companies A company with an existing business can apply for a primary listing of its ordinary shares. It must also satisfy the following requirements under the Listing Rules: its accounts must cover at least three years and the last period covered must not end more than six months before the prospectus; the accounts must be consolidated for subsidiary undertakings, independently audited in accordance with EEA accounting standards or equivalent, and have been reported on without modification; at least 75 per cent of its business must be supported by a historic revenue-earning record; it must control the majority of its assets, including over the three-year period; it must carry on an independent business as its main activity; it must have sufficient working capital for at least the next 12 months; a sufficient number of shares (25 per cent of the total) must have been distributed on admission to the public; the shares must be suitable for electronic settlement. As a UK-REIT, it will also need to avoid having shares controlled by persons which make it a close company. This will also apply if it is a property investment fund. Property investment funds A company wishing to list as a property investment fund under the open-ended investment company regime and use this as the means to become a UK-REIT does not need a three-year track record. However, in addition to the requirements listed above under The issuer, it will need to satisfy specific listing requirements including: it must have sufficient working capital for at least the next 12 months; a sufficient number of shares (25 per cent of the total) must have been distributed on admission to the public; the shares must be suitable for electronic settlement; the accounts must be independently audited in accordance with EEA accounting standards or equivalent, and have been reported on without modifications; it must invest and manage its assets in a way which is consistent with its object of spreading investment risk; although there is no restriction on it taking a controlling stake in an investee company, to ensure a spread of investment risk it should avoid: 1. cross-financing between its investee businesses including, for example, through the provision of undertakings or security for borrowings by such businesses for the benefit of another; and 2. the operation of common treasury functions as between it and its investee companies; it must not conduct any trading activity which is significant in the context of its group as a whole, although this does not prevent its investee companies doing so; no more than 10 per cent, in aggregate, of the value of its total assets at admission may be invested in other listed closed-ended investment funds; it must control the investment policy of any investee company or fund which itself invests in a portfolio of investments; it must publish an investment policy that contains information about the policies it will follow relating to asset allocation, risk diversification, and gearing, and that includes maximum exposures; it must have a board of directors or equivalent body which is independent of any investment manager appointed to manage its investments. The prospectus The prospectus, which is required as part of the process for listing a UK-REIT, must contain all the information that investors and their professional advisers might reasonably require, and reasonably expect to find, for the purpose of making an informed assessment of: 1. the assets and liabilities, financial position, profits and losses, and prospects of the issuer; and 2. the rights attaching to the shares.
The Prospectus Rules contain a schedule and buildingblocks for a prospectus. These will need to be followed, including the minimum requirements for an issuer which include: details of its principal activities; its group structure; details of its properties and environmental issues; its financial condition and results; its financial resources; trends in its business; management information including benefits and remuneration of specific directors and senior management; corporate governance information on its audit and remuneration committees; information on employees; information on major shareholders; related party transactions; financial information; its dividend policy and record; legal and arbitration proceedings; share-capital information; a summary of specific constitutional document terms; material contracts entered into in the previous two years; a working-capital statement; a capitalisation and indebtedness statement; the reason for, and details of, the terms for the shares being offered; of any underwriting; lock-up arrangements; expenses of the issue; persons responsible for the prospectus; information about the auditors; if available, selected financial information; risk factors; history and development of the issuer; details of the investments. Continuing obligations Under the Listing Rules, a UK-REIT will need to comply with a number of continuing obligations including: the appointment of a registrar; the control of inside information and compliance with the Disclosure and Transparency Rules, including the disclosure of price-sensitive information through a Regulatory Information Service (RIS); putting in place dealing obligations for directors, other persons with managerial responsibilities and employees with access to inside information (in particular, by adopting the Model Code); keeping a minimum number of shares in public hands; complying with the listing rules (as regards communication with shareholders and the conduct of transactions, including share issues, acquisitions and disposals of assets and constitutional changes); making announcements, coordinating communications and, possibly, obtaining shareholder approvals for significant transactions, or where there is a related party such as a director or substantial shareholder. A property investment fund which is listed under the closed-ended investment company regime is also subject to specific continuing obligations, including: it must have a published investment policy which complies with the Listing Rules at all times, investing and managing its assets: 1. in a way which is consistent with its object of spreading investment risk; and 2. in accordance with its published investment policy; not at any time conducting a significant trading activity; when making an acquisition of a constituent investment, observing the principles relating to cross-holdings set out above; continuing to comply with the other listing requirements referred to above; obtaining the prior approval of its shareholders to any material change to its published investment policy; unless approved by shareholders not issuing further shares of the same class as existing shares for cash at a price below the net asset value per share of those shares otherwise than on a pre-emptive basis; complying with the Model Code;
complying with the Listing Rules relating to transactions with related parties which includes any investment manager of the fund; observing rules in relation to significant transactions, except in relation to transactions that are executed in accordance with the scope of its published investment policy; notifying a Regulatory Information Service provider of the following: 1. any change in its tax status; and 2. within five business days of the end of each calendar month, a list of all investments in other listed closedended investment funds, as at the last business day of that month, which themselves do not have stated investment policies to invest no more than 15 per cent of their total assets in other listed closed-ended investment funds. Companies will need a sponsor to assist them in complying with these obligations. Financial information A UK-REIT will be required to: publish its annual financial report at the latest four months after the end of each financial year; and publish a half-yearly financial report covering the first six months of the financial year within two months after the period to which the report relates. A UK-REIT which is listed as a closed-ended property company is required to make additional disclosures in its accounts including information relating to its investment manager, the full text of its investment policy and how it has implemented the policy. In addition, it will also specifically be required to publish a summary of the valuation of its portfolio. Dividends Apart from the specific requirements relating to distributions under the UK-REIT regime, a UK-REIT will also need to follow the guidelines set by the Dividend Procedure Timetable, published on the Exchange s website at www.londonstockexchange.com and notified to the Exchange in advance. Settlement Shares will be settled in either CREST or Euroclear. Other central securities depositaries will be considered on a caseby-case basis. Corporate governance In addition to the specific requirements of the Listing Rules and Disclosure and Transparency Rules, a UK-REIT will be expected to satisfy UK corporate governance requirements. Fees A UK-REIT will be required to pay to the UKLA an initial application fee, an annual fee and a financial reporting fee. Current amounts for such fees may be found in the Fees Manual of the FSA Handbook (www.fsahandbook.info). A fee for admission to trading and an annual fee will also be payable to the Exchange, depending on the UK-REIT s market capitalisation. Takeover code A UK-REIT will be subject to the Takeover Code. A takeover may cause loss of UK-REIT status. Copyright June 2008 London Stock Exchange plc. Registered in England and Wales No. 2075721. London Stock Exchange plc has used all reasonable efforts to ensure that the information contained in this publication is correct at the time of going to press, but shall not be liable for decisions made in reliance on it. London Stock Exchange and the coat of arms device are registered trade marks of London Stock Exchange plc. London Stock Exchange 10 Paternoster Square London EC4M 7LS Telephone: +44 (0)20 7797 1000 www.londonstockexchange.com REITS/ABS/158