The debate over dual-class shares in the UK
The principle of ‘one share, one vote’ is long cherished by the UK investment community. Under current Financial Conduct Authority (FCA) rules, companies cannot be included on the premium segment of the London Stock Exchange (LSE) – the gold standard for corporate governance – if they have dual-class shares. Such companies also miss out on inclusion in key indexes such as the FTSE 100.
But London’s struggle to attract IPOs has forced a rethink. A government-commissioned review has proposed relaxing the rules around dual-class shares, as long as certain safeguards are met. The hope is to lure fast-growing, entrepreneur-led companies that want to tap the public markets without giving up control.
Investor expectations, however, might not shift with the regulatory landscape. Some asset managers have already indicated they will push back against the proposals. Whatever the final outcome of the review, London listings with dual-class shares are set to remain closely scrutinized.
The government review – chaired by Lord Hill – released its findings in March. It reported that the UK accounted for just 5 percent of IPOs globally between 2015 and 2020. The country has also witnessed a 40 percent decline in the number of public companies since 2008. ‘Looking at our relative performance and the range of feedback we have had, it is clear the current listing regime is in need of reform,’ notes the report.
To boost the number of IPOs, the Hill Review recommends a raft of changes for UK equity markets, including a relaxation of the rules around dual-class shares. It says companies with differentiated voting rights should be permitted on the premium segment – but with added protection for investors.
The report suggests dual-class shares should be allowed for up to five years only and the maximum voting ratio limited to 20:1. In addition, it suggests that shares with higher voting power should be held only by directors, convert to ordinary shares on transfer (with some exceptions) and be applicable in votes only on director elections and takeovers.
The proposals would provide founders with a ‘transition period’ during which they are protected from hostile takeovers or activism in the early years of being public, explains the review. After this time, companies could either follow the full rules of the premium segment, switch to another market segment or adjust their share structure via a shareholder vote.
The Hill Review says these changes would be ‘in line with the great majority of submissions we have received’ and recognize the need ‘to make sure we attract companies in vital innovative growth sectors such as technology and life sciences.’
Relaxing the environment for dual-class shares would bring the UK more in line with a range of international markets. In the US, for example, shares with different voting power are relatively common. Hong Kong and Singapore have allowed this approach since 2018 under certain circumstances. In Europe, there is a variety of approaches, but the EU is looking at proposals to ease restrictions across the bloc.
Claire Keast-Butler, a partner at Cooley who backs a relaxation of the rules around dual-class shares to boost the UK’s competitiveness, says the Hill Review’s proposals ‘offer a more restricted approach to dual-class structures than is typically seen in the US’, meaning companies considering both markets will still see a distinction.
‘The Hill Review suggests limiting the high-vote class to people who are directors of the company, whereas in the US we typically see all pre-IPO shareholders holding high-vote shares,’ she explains. ‘And in the US you have the high vote on all matters other than certain limited areas to protect the public shareholders. Lord Hill is recommending limiting the matters where the high vote kicks in to allow holders to ensure they remain as directors and can block a takeover.’
Keast-Butler says there is more alignment between the UK proposals and current US practice around sunset clauses. ‘We more typically see a seven-year sunset in the US,’ she says. ‘But five years is a sensible proposal, in terms of saying you can have these protections but there is a natural end-date to them.’
Any adjustments related to dual-class shares in the UK will need to pass through an FCA consultation before being brought in. The regulator has said it aims to consult on the proposals by the summer and bring in any changes before the end of 2021.
Changes to the FCA’s listing rules would not automatically allow companies with varied share classes to enter key indexes: index providers set their own standards. For example, S&P Global has refused to add companies with dual-class shares to the S&P 500 since 2017. FTSE Russell, which manages the key benchmarks in the UK market, says it will conduct a consultation with members soon after the FCA’s consultation.
This is an extract of an article that was published in the Summer 2021 issue of IR Magazine. Click here to read the full article.