The ability to have a dual-class voting structure can be an important consideration for high-growth, innovative companies (especially those in the technology sector) when deciding on an IPO venue.
These structures are not possible for a premium listing in London, whereas they are available on other major stock exchanges, meaning that the UK risks missing out on having these companies list in London.
Dual-class structures involve two different classes of shares with differential voting rights. This means that founders and other pre-IPO holders are able to maintain voting control of the publicly listed company through holding shares with enhanced voting rights, compared to the shares held by public shareholders.
The structure is particularly attractive to rapidly growing companies, especially in the technology sector, where founders wish to retain voting control following an IPO. A key argument in favour is that they allow visionary founders to concentrate on the company’s long-term strategy, growth and performance without having to keep one eye unduly on short-term targets and the risk of shareholder activism while they are still in the high-growth phase.
In the UK, a company with a dual-class structure would not be eligible for listing on the premium segment of the Financial Conduct Authority’s Official List, which requires a “one-share one-vote” capital structure. A company with a dual-class structure could only seek a listing on the standard segment of the Official List, which is significantly less attractive to investors and does not allow for entry into the main FTSE indices (the FTSE 100 and the FTSE 250).
This could be a missed opportunity. In fact, there are strong arguments for the UK to look again at dual-class structures.
For a start, it impacts our international competitiveness. The capital markets are increasingly global and UK companies have a choice of listing on a number of stock exchanges. Dual-class structures are permitted and relatively common in the United States, especially for technology companies, while in 2018, the Hong Kong Stock Exchange rules were changed to allow companies with dual-class structures to list on the exchange in certain circumstances and subject to certain requirements and restrictions, as did Singapore.
Other European countries are also looking at this. In May 2020, Italy introduced the ability for Italian listed companies to issue multiple voting shares of up to three votes, and dual-class structures are possible on Euronext Amsterdam, the European exchange that is arguably the biggest potential threat to the London Stock Exchange for listings of UK and European technology companies.
In the UK, the “one-share, one-vote” principle has long been seen as a core bedrock of investor protection. There are concerns that founders with enhanced voting rights can dominate decision making, with little or no representation on policy or strategy for those that provided much of the company’s capital, and that there are risks of conflicts arising between entrenched founders and management and other shareholders. There are also concerns that allowing dual-class structures would taint the so-called “gold standard” for listings on the premium segment.
However, these concerns are not insurmountable. In fact, some of the provisions of the recently introduced Hong Kong and Singapore rules could form part of a useful blueprint for the UK.
Dual-class structures could be limited to innovative and high-growth companies. Clear rules could be set for when enhanced voting rights would be lost, either after a set time limit or after the high-vote shares become less than a specified percentage of the total share capital or where a founder ceases to be involved with the business on a day-to-day basis. Consideration could also be given to carving out certain decisions from the enhanced voting rights, such as approval of related party transactions and remuneration decisions.
Specific enhanced corporate governance protections could be introduced for companies with dual-class structures, such as making compliance with the UK Corporate Governance Code (or certain aspects of it) mandatory rather than “comply or explain”.
Right now, the UK risks missing out on having high-growth, innovative companies list in London due to its stance on dual-class structures. The negatives are clear, as are the potential solutions to assuage concerns.
We urge the government and the Financial Conduct Authority to look closely at this issue, to ensure London stays competitive post the Brexit transition period as a listing venue for high growth companies.
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