By Matthew Fisher and George Taylor*
(FPRI) — The Conservative government of Theresa May confirmed in May 2019 that it was considering introducing a new power to block securities listings that threaten the national security of the United Kingdom. The announcement came on the heels of criticism from the House of Commons Foreign Affairs Committee about the handling of En+’s initial public offering (IPO). The Russian energy company was welcomed to the London Stock Exchange in November 2017, only to be sanctioned by the U.S. government a few months later amid allegations that En+’s founder, Oleg Deripaska, enjoys a close relationship with the Kremlin and has perpetrated serious crimes.
In response to this uncomfortable episode, the UK Financial Conduct Authority (FCA) explained, in effect, that the allegations surrounding En+’s founder (which were publicly available at the time of the IPO) did not in themselves constitute legal grounds for halting the listing. Introducing a power to block listings on national security grounds would fill this gap in the legal regime, but would require the government—now led by Boris Johnson—to grapple with challenging technical, practical, and policy questions.
What Does “National Security” Mean?
While national security and similar concepts have been used in UK legislation for over a century, neither the legislature nor the courts have clearly defined the term. In July 2018, however, a government consultation and policy statement shed some modest light on the concept. The government proposed legislation that would see it granted significantly greater powers to intervene in foreign investment (particularly mergers and acquisitions) on national security grounds. While explicitly declining to define national security, the policy statement does note that “national security goes beyond defence of the realm” and “relates to all genuine and serious threats to a fundamental interest in society,” before setting out an illustrative list of foreign investment scenarios that could pose a threat to national security.
Any government seeking to introduce a power to block listings on national security grounds is unlikely to reinvent the wheel: it most likely would seek to protect its wide discretion by either leaving national security undefined or sketching out the concept in illustrative and broad terms only (following the July 2018 proposal’s approach). In either case, the Foreign Affairs Committee’s discussions indicate the concept would need to be broad enough to capture listings that would risk (a) harming the stability, integrity or reputation of the UK financial markets or (b) financing companies or shareholders associated with hostile regimes.
What Would the Blocking Power Block Exactly?
Listing securities in the UK generally entails three separate (but linked) regulatory processes. Blocking any of them would cause the listing to fail, but, for the reasons set out below, applying the blocking power to the process of admission to the Official List is likely to be the only viable approach:
- Admission to a trading venue is overseen by the commercial operators of the venues in question, which, aside from being ill-placed to determine matters of national security, are likely to object to implementing a power that would jeopardize their reputation for political neutrality and open exchange. Simply put, it would be bad for business.
- FCA approval of the prospectus is subject to requirements that are fully harmonized at the EU level. If the FCA were only to approve prospectuses for listings that do not threaten UK national security, it would, in effect, be unilaterally introducing an additional prospectus approval requirement. This would be inconsistent with the principle of harmonization and, therefore, not permissible while the UK remains in the EU. Even after Brexit, tampering with the prospectus approval requirements is unlikely to be appetizing as it would cause the UK and EU regimes to diverge, potentially ruling out any future “passporting” arrangement whereby the UK would recognize EU-approved prospectuses and vice versa.
- Admission to the FCA’s Official List is governed by rules that are neither subject to full EU harmonization nor administered by a commercial enterprise, making it the process most suitable to apply the blocking power to (even if the UK ultimately remains integrated within the EU capital markets).
Given the commercial and practical difficulties of blocking admission to trading, along with the legal and political difficulties of blocking approval of the prospectus, the remainder of this article assumes a power to block listings on national security grounds would take the form of a block on admission to the Official List.
Is a New Blocking Power Necessary?
The FCA is especially demanding with respect to the quality and comprehensiveness of the prospectus when it comes to any company with a murky history or controversial associates. As a practical matter, therefore, many such companies miss the market window for conducting their listing and never make it to the stage of applying to the Official List in the first place.
Should such a company reach that stage, the FCA can under existing powers refuse admission to the Official List if the listing would be “detrimental to the interests of investors.” There is no guidance on how the FCA interprets this power, and its use is rare and not a matter of public record. However, the authors are familiar with one instance from practice in which the FCA stated that an equity listing would be detrimental to the interests of investors unless the would-be issuer’s shareholder structure could be adjusted to restrict the voting power of a significant shareholder alleged to have links to organized crime. This suggests the FCA sees the interests of investors as lying in good corporate governance, free from criminal or corrupt influences. This reading has two interesting implications. Firstly, it appears that the FCA, applying an unknown standard, did not consider the criminal allegations against Mr. Deripaska sufficient to justify refusing En+ admission to the Official List on the grounds of detriment to investors’ interests. Secondly, it is at least arguable that there is an overlap between the concepts of detriment to investors’ interests and threat to national security, on the basis that use of UK financial infrastructure by the criminal and the corrupt undermines market integrity and often helps prop up hostile regimes. However, any overlap is only partial; one can well imagine, for example, a company’s links to a foreign government being a threat to UK national security while simultaneously a boon to the company and its investors. The FCA’s existing blocking power therefore appears ill-defined and inadequate to address the full array of matters that threaten national security.
The government could try to shoehorn the existing power into place by having the FCA publish guidance to the effect that investors on the UK markets have an interest in upholding UK national security. This would broaden the existing blocking power sufficiently to capture any listing detrimental to national security—not just those that involve an element of criminality or corruption. However, given the absence of full alignment between investors’ interests and national security, such guidance might be challenged as an attempt to distort the natural meaning of the law in order to allow the FCA to overreach its statutory authority.
More likely, therefore, the government would conclude that it is necessary to introduce legislation (referring explicitly to national security) to implement the new blocking power. Such legislation would presumably receive the full support of the cross-party Foreign Affairs Committee, which would likely facilitate the blocking power’s progress through Parliament.
Which Competing Policy Considerations Would the Government Need to Weigh?
A properly implemented power to block listings on national security grounds would address the vulnerability of the current listing regime to abuse by hostile actors, arguably helping to enhance London’s reputation for being a clean and secure financial centre. Indeed, the mere act of bringing such a power onto the statute book would send a political message that the UK intends to thwart any attempt to subvert its capital markets. Such benefits come at a price, however.
For one thing, a power to block listings on national security grounds would erect another hurdle for companies seeking to list in London. This is particularly significant given that, according to the authors’ research, neither the United States nor any major European jurisdiction has implemented an equivalent power. Potential issuers may prefer to list on one of these markets, rather than committing additional time and resources (potentially in vain) to convince the UK authorities the listing does not threaten national security.
In addition, the exercise of a power to block listings on the basis of the nebulous notion of national security would risk politicizing the UK’s capital markets. If such a power were to be perceived as disproportionately targeting transactions by companies from a small group of countries, even high-quality applicants from such countries may be discouraged from seeking to list in London for fear of “guilt by association.” This may be of particular concern for companies from emerging markets, where informal business practices and government involvement in the economy may be more prevalent.
What Happens Next?
The Foreign Affairs Committee has been vocal on the need for the government to take action in this area for some time now, and has stated its intention to follow closely the government’s progress. That the Conservative government is now led by Boris Johnson is unlikely to change this. However, pressure from the Foreign Affairs Committee is likely to go only so far: while the government has committed to undertake a full consultation on a power to block listing on national security grounds if it determines it appropriate to introduce such a power, the government has not set itself a deadline to make such a determination. Even if a consultation is launched promptly, it is worth noting that the July 2018 consultation on a similar power in relation to foreign investment has yet to result in even draft legislation. The road ahead for any listing blocking power is unlikely to be a short one.
This article represents the views of the authors only and is not legal or financial advice.
*About the authors:
- Matthew Fisher is a columnist at BMB Russia Blog. He is a lawyer in the London office of Cleary Gottlieb. His law practice focuses on high-value corporate/financial transactions in the Russia and CIS markets.
- George Taylor is a trainee solicitor at Cleary Gottlieb in London. He has experience in the firm’s capital markets and mergers & acquisitions practice groups, and has a particular interest in the emerging markets. He holds a BA (Hons) in War Studies and History
Source: This article was published by FPRI