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On 13 February 2013, the London Stock Exchange announced its new High Growth Segment, which aims to create a new market segment on the Main Market for fast growing companies that want a stepping stone to the premium listing option.

Under the new rules proposed in its draft rulebook, companies will be eligible for admission to the High Growth Segment if they meet certain criteria.

The creation of the High Growth Segment will be welcomed by growing companies from all sectors and will certainly encourage technology companies to float in the UK rather than seek an overseas listing, in particular on NASDAQ in the US.

John Holland from Flotation Consultants Holland Bendelow said ‘The New High Growth Segment is a very welcome initiative. The London Stock Exchange has changed the regulatory framework incorporating elements of both AIM (The Alternative Investment Market) and The Main Market to form, for the first time, a High Growth Segment.’

It is proposed that companies who are trading on the High Growth Segment will not be admitted to the Official List of the Financial Services Authority (FSA). Importantly, this means companies will not be subject to the FSA’s Listing Rules. Instead, the ‘High Growth Segment’ will be regulated by the London Stock Exchange and companies will have to comply with the LSE’s Admission & Disclosure Standards, and a new High Growth Segment Rulebook.

Which companies are eligible for the High Growth Segment?

Companies that can satisfy a number of the eligibility requirements, including:

• Be incorporated in the UK and in a state of the European Economic Area (EEA)

• Be trading businesses, however mineral resource companies at exploration stage, and investment entities are not eligible

• Eligible companies will be required to admit at least 10 per cent of their securities to trading and be in public hands

• Prior to admission, companies and their advisors must have published a prospectus in relation to the securities to be admitted which complies with the Prospectus Rules and has been approved by the FSA or another EEA member state’s competent authority (as applicable). The prospectus must be in English. In the prospectus, issuers will be required to give a non-binding indication of their intention to apply for admission to listing on the Official List in the future.

• Companies will need to demonstrate an annual growth of 20 per cent or, more over a three year period prior to joining the High Growth Segment.

The on-going obligations

The High Growth Segment has a mix of rules from both the AIM and Main Market rule books. These are designed to provide a degree of flexibility for high growth companies.

Key on-going obligations

• Companies undertaking major transactions will still be required to announce the terms of any transaction which, after applying the class tests set out in the Rulebook, has a percentage ratio of 25 per cent or more. However, importantly, for such transactions, High Growth Sector companies are not be required to seek prior shareholder approval.

• If a company enters into a related party transaction it must announce the terms of such transaction, including the name of the related party and the details and nature of the related party’s interest in the transaction. The definition of related party transaction in the High Growth Sector rulebook is the same as in the existing Listing Rules and applies to a transaction where any percentage ratio in the class tests is at least 5 per cent.

• If a company wishes to undertake a reverse takeover it must first obtain shareholder approval and the company’s admission to trading will be cancelled at or prior to completion of the reverse takeover.

• High Growth Sector companies will be required to report on their corporate governance practices in their annual report, and in particular, state how they have applied the main principles of corporate governance code.

John Holland was the former head of the UK regional operation at the London Stock Exchange, with responsibility for both AIM and The Main Market. He has been advising companies since 1995 about stock market flotation and is a regular author of company finance and stock market publications and articles in business and financial press as well as various institutions on the internet.