What does the introduction of a dual class share structure to the London Stock Exchange mean for investors? Andrew Holt takes a look.
Whether out of innovation or desperation, earlier this month the Financial Conduct Authority (FCA) implemented a series of changes to the London Stock Exchange’s listing rules.
Central to the array of updates is giving founders more control over their business when it joins the main market.
Greater control comes in the form of the introduction of dual-class shares, which give founders, and other senior executives, extra, or even all the voting rights. It effectively means no more “one share, one vote” for investors.
The likes of Mark Zuckerburg, who started Facebook, used the structure to build his business without hindrance from other shareholders. It has become the way many tech company founders have built their businesses. It lets them raise growth capital without losing control.
The structure essentially offers investors the benefit of being part of a fast-growing company – and all the return benefits that entails – but at the price of having little or no say in what the company does, or direction it takes. Could this deter some fund managers from investing in such shares?
The structure is already being used on exchanges in New York and Hong Kong, which have given them an advantage over London. Many working in the City have come to the conclusion that not introducing dual-class shares sooner has probably discouraged tech entrepreneurs from listing in London.
Therefore, the move to boost London’s exchange could be seen as an act of either innovation or desperation in the face of competition from other bourses for these much in-demand listings, which are invariably technology and biotech companies.
The move also comes after rule changes were made in the summer to allow so-called “blank cheque” special purpose acquisition company (Spac) – shell companies established to raise capital via an initial public offering (IPO) to buy companies – to list.
The reality is that this change has probably been driven by concerns that London was losing out. In essence, a pragmatic conclusion was probably reached with how best to take London forward while maintaining its global status as a centre for companies to create a market for their shares.
And while the moves are clearly aimed at making the City more attractive to high-growth companies they can also be seen as part of a broader push by chancellor Rishi Sunak to make London a more appealing destination for global investors and companies post Brexit.
In this way, the changes made by the FCA follows two separate reviews by former Worldpay chief executive Ron Kalifa and one-time EU financial services commissioner Lord Hill. Both reviews urged the UK to make the jump into the brave new world of dual-class shares.
Corporate law expert James Kaye, of legal firm Pinsent Masons, said the move to introduce the share class to London’s premium market could well have the desired impact of attracting more technology firms to London.
“In the same way as we have just seen the first Spac listing in London after the listing rules were changed in mid-2021, these changes may lead to founder-led technology companies looking at a London market IPO later in 2022,” Kaye said.
However, he also noted a big question mark about how investors will approach the new structure. “While the listing rule changes now permit dual class share structures, the real test will be whether London investors are as willing to accept them as they have been in other markets.”
Only time will tell how this plays out. Could investors in London take a different approach to those in New York and Hong Kong where investors have typically embraced dual-class shares?
Minimum market value
The FCA reforms will also result in allowing as little as 10% of a company’s shares to be offered in an IPO, dramatically down from the previous minimum of handing a quarter of a company’s shares to the market.
The reforms will also force smaller companies – defined as those worth less than £30m – that plan to list in London to choose alternative platforms, such as Aim or the Aquis Growth Market, rather than the official list. As the new regulations substantially lift the minimum market value for a listing on London’s main market to £30m from £700,000.
Alasdair Haynes, founder and chief executive of the Aquis Exchange, noted the rationale for the move, highlighting the change would “encourage small and medium enterprises to list on a venue with proportionate regulation and support”. And he cited it as “a positive step for SMEs, for investors and for Britain”.
It remains to be seen if institutional investors will surrender their right to a say in how companies are run in the hope of gaining exposure to what could be the next darling of the tech world. The rise in responsible investment mandates could make this difficult.