- New rules aimed at company founders
- Weakened investor protections
The Financial Conduct Authority (FCA) will allow US-style special voting shares and cut the free float needed to list on the London Stock Exchange, in a bid to bring more companies to public markets and compete with the New York bourse.
This is the biggest overhaul of the listings regime in three decades and also includes lessening disclosure requirements around significant and related-party transactions.
The FCA said the shake-up brings the UK’s listing regime in line with international norms while making sure that “appropriate investor protections” remain in place.
Sarah Pritchard, the FCA’s markets and international executive director, said: "A thriving capital market is vital in delivering investment to growing companies plus returns and choice to investors. That’s why we are acting to make it more straightforward for those seeking to list in the UK."
The changes follow a review conducted by Lord Hill in 2020, which found that the number of listed companies in the UK had fallen by around 40 per cent from a 2008 peak.
New chancellor Rachel Reeves described the changes as “a significant first step towards reinvigorating our capital markets”.
James Lowen, a senior fund manager of the JOHCM UK Equity Income Fund, said that although these changes were welcome, "more will need to be done" to improve the attractiveness of the UK's equity markets, such as mandating domestic allocations for UK pension funds and removing stamp duty on transactions.
Not everyone is happy with the changes, though. Last month, a group of pension fund representatives wrote to the FCA expressing concern about the changes and calling for a delay.
The letter, signed by the chair of the Asset Owner Council UK Corporate Governance Group and the chief executive of the London Pensions Fund Authority, expressed particular concern that changes to voting share classes could dilute shareholders’ rights in a way that “can be detrimental to firm value”.
It urged the FCA to "retain the critical shareholder rights that have helped the UK build a reputation as the world’s ‘quality’ market and provided it with one of its few key differentiators".
The new rules will apply from 29 July.
Founders of US tech giants and family-owned conglomerates often rely on dual-class share structures to hold on to a majority of voting rights while also profiting from the success of their company. Facebook founder, chief executive and chair Mark Zuckerberg owns class B shares, which have 10 votes per share, so his 13.5 per cent holding of Meta (US:META) gives him total control. The company lists 23 total class B shareholders, but Zuckerberg owns around 345mn of the 350mn in issue.
There were rumblings about his leadership when the metaverse rush petered out but the company’s share price (class A) going from $100 a share in late 2022 to over $500 currently is enough to quiet down any opponents.
Rideshare company Lyft (US:LYFT) has been more of a car crash for investors. Its founders gave themselves 20 votes per share through a dual-class structure when listing in 2019. The two men holding the supervoting shares, Logan Green and John Zimmer, stepped down last year as chief executive and president after years of poor performance at the company. But Green shifted to chair of the board – not the usual path for someone who oversaw a share price going from $80 to $10 at the time of his resignation in March 2023.
Alphabet (US:GOOGL) takes the rights given to US-listed companies even further – it has three classes of shares, one of which has zero voting rights. GOOGL shares (class A, with voting rights) trade at a slight premium (maybe half a percent) to GOOG, or class C, shares. In the UK, investor appetite for this style of founder-led structure was shown at THG (THG), where Matthew Moulding had a ‘golden share’ that could block any buyout. He gave this up last year in the face of investor unhappiness, although this was partly because it blocked THG from index inclusion through a premium listing.
Finally, the only side of the FCA changes include dropping shareholder votes for some related-party transactions. The regulator has painted a picture of a tightly regulated regime which holds limited interest for dynamic founders and innovators. “The FCA has been clear that the new rules involve allowing greater risk, but believes the changes set out will better reflect the risk appetite the economy needs to achieve growth,” the regulator said.
But the bottom end of the main market holds plenty of companies largely doing as they please, with tiny boards and few independent directors.
One company we’ve previously used as an example of the lax standards on the main boards, (compared to Aim especially), is Wildcat Petroleum (WCAT), which at one time was worth over £60mn despite being an unfunded cash shell. Its managing director owns 61 per cent of the company and admitted to lying on a promotional podcast last year about his dealings with the FCA.
Currently investors have an idea of what kind of company they’re buying into with the designation of premium and standard listings, but getting rid of this muddies the waters given the lax standards for the latter.
Additionally, the FCA has done away with ‘track record’ requirements in order to encourage “high-growth” companies to list earlier. This means current tests around revenue and working capital are gone. This information would still be included in the prospectus, however. The FCA is effectively taking away a level of protection for investors and wishing them luck. Alex Hamer
