UK Listing Review – What’s It All About?

You may have noticed in the Chancellor’s Budget speech that he announced that the FCA will be consulting on Lord Hill’s review to encourage companies to list in the UK and on changes to the listing and prospectus rules. This article gives a summary and some comments on what is proposed.

The reason for the review is given as a decline in the number of companies listed in the UK with many of those listed being “old economy” businesses. Too few world class technology or life science companies list in the UK. Reasons given for this are over-complex listing rules and long timescales that inhibit some companies from choosing London as a listing venue. There is also growing competition from financial centres such as Amsterdam.

Three particular issues for example are restrictions on dual share class structures that enable entrepreneurs to retain control of public companies they founded, minimum free float requirements and restrictions on SPACs (special purpose acquisition vehicles created to acquire businesses). The existing UK listing rules do protect investors, but as Lord Hill’s report says: “Our bottom line is this: it makes no sense to have a theoretically perfect listing regime if in practice users increasingly choose other venues”. Lord Hill suggests there is a general demand for change and reform.

Of course it is worth pointing out that many of the rules that govern listings, such as that for the content of prospectuses, were devised by the EU. But Lord Hill says this: “It is not, however, the case that simply leaving the EU will mean that all UK regulation will automatically become proportionate, adaptable and fleet of foot. British Ministers and regulators are just as capable of constructing over-complicated rules that discourage business investment as their European counterparts. It is, for example, a very widely held view that regulatory requirements on business and the liability profile of companies and their directors have increased significantly over time: indeed, this is one of the frequently cited reasons as to why there has been a trend of companies shifting from the public markets to private ones or never accessing the public markets at all”.

What are his specific proposals? I’ll cover some of them and add some comments:

  1. He proposes to permit dual-class structures, but with some safeguards. Comment: dual class structures enable directors to run the business as if it is a private company rather than a public one. Similarly low free float requirements inhibit minority investor protection. He suggests safeguards might include a maximum duration of 5 years but will that really satisfy entrepreneurs who wish to retain control? Giving control of a company to insiders is fine as long as the business is doing well, but when in difficulties it can obstruct change or enable a company to be easily delisted and taken private.
  2. He proposes to permit dual-class structures, but with some safeguards. Comment: dual class structures enable directors to run the business as if it is a private company rather than a public one. Similarly low free float requirements inhibit minority investor protection. He suggests safeguards might include a maximum duration of 5 years but will that really satisfy entrepreneurs who wish to retain control? Giving control of a company to insiders is fine as long as the business is doing well, but when in difficulties it can obstruct change or enable a company to be easily delisted and taken private.
  3. He proposes a complete rethink of prospectus regulations. That may include the provision of “forward-looking” financial information and the relaxation of prospectus exemption thresholds. But there is surely a big danger here that directors might make wildly optimistic statements about a company’s future prospects when there is no risk of liability for doing so. In addition he suggests “alternative listing documentation” where a further issuance from an existing listed issuer is being done. The latter is a very sensible change as it’s exceedingly bureaucratic and pointless to require a full prospectus when more shares are being issued to existing holders who are already familiar with a company. A complete review of the prospectus regulations is also a good idea after the recent Lloyds/HBOS judgement where the judge decided that the omission of very significant information did not matter as shareholders would have voted for it anyway (an unreasonable presumption).
  4. He also makes recommendations “to try to empower retail investors, recognising their changing expectations and the way that developments in technology create new possibilities of engagement”. He reminds readers of the problem of retail investors exercising their rights in intermediated securities. But all he says on this is: “Much as BEIS put forward a vision of how utility companies should collaborate to create common platforms and network protocols for the introduction of smart meters, a similar approach could be taken to develop technology solutions that would better enfranchise retail investors”. But he is certainly right in suggesting the “plumbing” is the problem which needs tackling.

In summary this is useful report but I am not sure it faces up to some of the real issues. Will companies flock to list in London simply because of the changes proposed? Companies list in markets which they perceive as attractive for a wide range of reasons. That includes perceptions of likely achievable share prices against comparable companies already listed in those markets. You can’t fix that problem by changing the listing rules. Another problem is the more onerous corporate governance requirements in the UK than in other countries, which can deter public listing, but it would be a pity to lose the good aspects of that.

You can read Lord Hill’s Listing Review here: https://www.gov.uk/government/publications/uk-listings-review

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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