News that Amsterdam surpassed London as Europe’s largest share trading centre in January 2021 was at the time exaggerated as a harbinger of post-Brexit doom despite having minimal tangible effect on the City. However, it was undoubtedly a symbolic overtake and its effect was felt most strongly as a catalyst for the country to overhaul its capital markets. It accelerated pressure on the government to reform the existing listings system which lagged behind its rivals in New York and Europe, especially with regard to capitalising on the fintech and Special Purpose Acquisition Company (SPAC) boom. As Finimize notes, London accounted for only ‘5% of all global stock market debuts between 2015 and 2020’ and since 2008 ‘the number of companies listed on the UK market has dropped by about 40 per cent’.
In Rishi Sunak’s speech on the ‘Future of Financial Services’ at the House of Commons in November 2020, he set out his ambition to review listings in the UK and delegated this review to Lord Jonathan Hill, former EU financial services commissioner. To this effect, Lord Hill published the UK Listings Review which aims to make the UK a more attractive place for the most innovative and successful companies to publicly list. On 19 April 2021, the government announced its commitment to all of the reforms recommended by Lord Hill.
The financial markets have also been essential to the buoyancy of the economy during the pandemic, and the government notes that ‘they will play an equally important role in the recovery phase’. As of March 2021, the combined value of all the companies listed on the London Stock Exchange is around £3.8 trillion with over 1,300 listed companies. The financial markets are a key contributor to the financial health of the country and the financial services sector. It is therefore vital to reform the listings requirements to keep the markets dynamic and competitive to support initial public offerings (IPOs) and general equity financing on the global stage. However, whilst reform is welcome, there is significant opposition to the suggested reforms which argues that London is panicking and following the decisions of Amsterdam and other markets without respect to the specifics of the London market.
The Review’s recommendations include an annual report delivered to Parliament by the Chancellor on the State of the City and changes to listing rules, including around dual-class share structures, free float requirements and SPACs. It also recommends a re-designing of the prospectus regime. This article will consider these suggestions more closely and their projected success in application, and finally, assess some of the implications for law firms and their clients.
Dual-Class Share Structures
Dual-class share structures allow two different classes of stock with different voting rights. This affords certain individuals (Class B shareholders, most commonly the directors and executives of the company) to have greater power in the managing of the company disproportionate to those who hold the other type of stock (Class A shareholders, the third-party investors). Until Lord Hill’s review, companies with dual-class share structures were previously not allowed to list on the London Stock Exchange’s (LSE) premium listing segment (including the FTSE 100). This disincentives tech companies and start-ups who prefer to retain greater control over their company after floating from listing in the UK. Examples of companies that have decided to list in the US because of the dual-class share structure include fashion tech giant Farfetch and Spotify.
In section 2.1 of the Listings Review, it recommends to ‘[a]llow companies with dual class share structures to list in the premium listing segment but maintain high corporate governance standards by applying certain conditions. These would include: a maximum duration of five years; a maximum weighted voting ratio of 20:1; requiring holder(s) of B class shares to be a director of the company; voting matters being limited to ensuring the holder(s) are able to continue as a director and able to block a change of control of the company while the DCSS is in force; and limitations on transfer of the B class shares’.
The conditions are intended to protect the companies against hostile takeovers by ensuring the founders retain control during a transition period. It is designed to ‘provide a way for the founder of the company to continue to be able to execute their vision for how the company should evolve and grow while still allowing others to share in that growth’.
However, whilst these make listing in the UK potentially much more attractive to fintech start-ups, dual-class shares could be less popular with UK investors. The Financial Times Lex column argues that ‘[t]hey see equal treatment of shareholders according to economic exposure as an inviolable principle’. Daniel Thomas from the FT quotes Romi Savova, founder and CEO of PensionBee, ‘[options] are already there for companies at all stages of growth…[reforms are] driven by the venture capital sector rather than what many other stakeholders within the economy want to see from companies that operate in the public sector”.
There are therefore concerns over whether the proposed listing reforms are the most effective method of balancing investor interest and the incentivisation of new companies. The UK is renowned for high corporate governance standards and investor safeguarding; it may be more pertinent to raise ESG standards for companies and to focus on attracting more investors. This view is substantiated by the lack of appetite from UK bankers to invest in companies that cannot pay a dividend until they are making a profit. Evidence for this is Deliveroo’s IPO in March 2021 which supposedly crashed because of the unwillingness of UK investors to back a company with dual-class shares. Given that most tech companies and start-ups do not make a profit for several years, this could suggest that London may not have the investor culture to compete with rival markets based in New York for the most valuable IPOs.
Another key element of the review was easing the rules around SPACs. This proposal was made in response to the boom in SPACs over the pandemic, which made around $80 billion in gross proceeds from 248 companies in 2020. New York dominated over 99% of finances raised worldwide from SPACs in 2020 since their listing requirements are more facilitating of SPACs (see also Arista Lai’s article). Since SPACs present a ‘potentially important source of equity financing and route to market for UK companies, including in particular in relation to technology-related companies’, reform in this area could be potentially very impactful.
Section 2.4 of the review notes that ‘while there may be several reasons why UK SPAC financing has not emerged at scale, a key factor is regulatory and relates to FCA rules which can require trading in a SPAC to be suspended when it announces an intended acquisition’. This trading suspension deters investment in SPACs since investors could be committed to their investment for an unquantified period without their ability to leave.
The suggested course of action involves recommending to the Financial Conduct Authority to ‘remove the rebuttable presumption of suspension and replace it with appropriate rules and guidance further to increase investor confidence in these companies’. It stipulates further guidance for the FCA on certain points including ‘the rights investors in SPACs must have to vote on acquisitions prior to their completion’.
The Road Ahead
In terms of implementation, the listings review can only call upon the FCA to change the listing rules. It also does not detail specific measures that should be carried out but rather suggests general areas for the FCA to consider. The listings review is not a piece of enforceable legislation and it, therefore, remains to be seen whether such recommendations will be carried out. Even if they are, the question exists of whether the SPAC boom will continue after the pandemic. Norton Rose Fulbright proposes that the boom was caused in a large part by the ‘uncertain economic environment caused by the COVID-19 pandemic, as well as a reassessment of the traditional IPO process and the search for alternative paths to public markets’. Many have also suggested the possibility of a bubble, however, the prevailing consensus seems to be that SPACs are here to stay if not with the same intensity as during the pandemic.
If these recommendations are followed through, there should be an increase in IPOs (especially those using SPACs) in the London market. This trend may not continue if investor confidence does not present the demand for dual-class shares and relaxed investor safeguarding. Law firms will therefore see an increase (if temporary) in drafting IPO prospectuses and preparing companies for IPOs and also in compliance work for new regulation. It may also result in a larger proportion of tech companies on the FTSE indexes, which may gradually change the sort of clients large UK-based law firms deal with, although this is unlikely. Ultimately, the effects are yet to be seen, but they have the potential to significantly propel the UK’s position in the global capital markets.