Woodford Legal Claims, But How Long to Settlement?

There is a good article in this week’s edition of the Investors Chronicle covering the various legal claims being pursued over the debacle of the Woodford Equity Income Fund. ShareSoc is backing a claim managed by solicitors Leigh Day but there are several other law firms competing to represent the 300,000 investors affected.

The article makes some good points and is certainly worth reading if you have suffered losses on any of the Woodford funds. But it suggests that the legal process could take as long as “two to three years” based on comments from the law firms. That’s presumably if the claim is successful.

In fact it might take a lot longer. For example, and coincidentally, my wife was a small claimant in the Royal Bank of Scotland Rights Issue case. That stems from 2008, and she has just received the second interim payment after the case was settled out of court. There may be more to come while the overall costs to be deducted are not yet clear but will obviously be substantial.

But twelve years to achieve a result is possibly a better estimate than two to three years. With many investors elderly, one wonders how many of them die before their claims in such actions are settled. It is a good example of the inability to obtain justice swiftly and at reasonable cost that is a major defect in the English legal system. Lawyers benefit greatly from the current system of course. In effect we have a Rolls-Royce legal system when we would be better served by a Ford version. Even the Rolls-Royce version does not necessarily provide justice as we have seen in other recent cases (e.g. the Lloyds/HBOS case).

Also coincidentally the Law Commission has just issued a call for ideas for the Law Commission’s 14th Programme of law reform” – see https://www.lawcom.gov.uk/14th-programme/ . Surely one idea worth suggesting is how to demolish the massively complex process of pursuing a commercial claim in the investment sphere.  We need much simpler law, simpler processes and quicker judgements.

Meanwhile although I have no interest in the Woodford claims as I was never invested in any of his funds, I would not wish to discourage any participation in legal claims so long as you study carefully any contract which may be proposed. The outcome may be uncertain and the process lengthy but success might discourage other similar cases and encourage the FCA to tighten up the rules for fund managers.

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

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Parsley Box Webinar, Wey Education Offer, Crimson Tide Placing and Deliveroo

I have just watched a Mello presentation by Parsley Box (MEAL) which was most interesting. They have recently listed on AIM at a price of 200p valuing the company at £84 million. The business supplies “ready meals” direct to consumers and targets the “baby boomers” like I and my wife, i.e. the 70+ age group, or younger. To quote from their prospectus which is well worth reading: “Parsley Box is listening intently to its customers and aspires to champion the needs of the life-loving 60+ population, whose voice has gone too long unheard and untapped”.

The products are pre-cooked and do not need refrigerating so can be stored in any cupboard with a shelf life of 6 months. It is not a subscription model and orders can be placed by phone or over the internet with next working day delivery. Convenience is clearly the key in comparison with having to visit a local store or order a take-away – you just need to open a cupboard.

The business was founded in 2017 and revenue last year was £24 million with a pre-tax loss of £3.2 million. The reason for the loss seems to be the high expenditure on marketing to grow the customer base. The management team seems very experienced even if the CEO looks a lot younger than his age. When will it make a profit? Who knows?

On a quick read of the prospectus I could not see anything amiss but I have ordered a sample pack to personally check out the product before investing – it does seem to have good reviews on the net. My only possible concern is that there are no clear barriers to entry in the business so competitors could move into the space. That was one reason why I did not consider buying shares in Deliveroo which turned into the biggest IPO flop ever – that’s apart from the dual voting structure which also put off many institutional investors and several other concerns about the business.

One surprise today was an offer for Wey Education (WEY) which I have held since 2019. It’s a bid from Inspired Education via a scheme of arrangement – a cash offer at 47.5p which is a premium of 46% to the last closing price. They already have 53% of the shares committed to vote in favour and with the offer looking very generous I think it’s likely to be a done deal. I will certainly be voting in favour.

Another slight surprise today was a placing by another small AIM company I hold which is Crimson Tide (TIDE) who share a director with Wey. They are raising £6.0 million to fund more sales/marketing and product development. The annual results also announced today were positive with revenue up 21% and pre-tax profits up 51%. However, the historic rate of growth of this business has not been great so perhaps the intention is to fix that. The amount being raised will certainly substantially dilute the share base so it needs to help with revenue and profits growth or eps will be falling significantly.

It seems to make sense to raise funds to develop the business but I will not be rushing into buying the shares particularly until the picture is clearer.

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

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Margin Calls Not Met – $Billions Lost

On the 23rd March I warned about the dangers of the rise in speculation among small retail investors. I said this: “I suggest that buying shares on margin should be accompanied by very strong health warnings to investors and tougher regulations. It was one of the reasons for the collapse of the US stock market in the 1930s. Too many folks geared up with broker loans that were unsupportable when the market headed down. Investors were unable to meet margin calls, and the lenders then went bust”.

But this is also a problem among larger investors. Today the FT reported that Credit Suisse and Nomura – two of the world’s largest banks – faced large losses after their client Archegos Capital Management, for whom they acted as prime broker, failed to meet margin calls.

Nomura said it estimated that its claim against the client might be $2 Billion or more if asset prices continued to fall. The share price of Nomura fell by 16% as these events might wipe out its second half profits. The losses at Credit Suisse might be even higher at between $3 Billion and $4 Billion it is suggested in the FT article.

Archegos, an investment company, has been dumping shares after sharp declines in ViacomCBS and Chinese technology stocks.

The problem is that whenever a few big players become over-leveraged their failure can have the effect of falling dominoes as they trigger the collapse of other players. Even if the lenders don’t fail, the sales of holdings when margin calls are not met depresses the share prices of those holdings. In summary there are too many people betting on rising markets and trading on margin. Financial market regulators seem to have taken no notice of the growing risks attendant on this structure.

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

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ShareSoc VCT Webinar Report

I attended a webinar organised by the VCT Investors Group of ShareSoc last night, and spoke on the panel. This is a very brief report on what was certainly a useful event for anyone invested in Venture Capital Trusts. There should be a recording of the event available from the ShareSoc web site to Members in due course.

There were good presentations on some problematic VCTs – the Edge Performance VCTs and the Ventus VCTs. ShareSoc was involved in campaigns on those companies. The former, which have multiple share classes, showed poor performance on all but one share class, and poor corporate governance resulting in shareholders demanding some changes. There are two Ventus VCTs that specialise in renewable energy which no longer qualifies for VCT investment. The directors are now proposing to wind up the companies.

Another “problem” case I spoke about was Chrysalis VCT which was another company that got into a difficult situation. Assets declining making it look unviable with high fixed costs and the portfolio consisting of dubious holdings such as Coolabi (also a holding in the Edge VCTs). Shareholders decided to wind up the company on the recommendation of the directors in October 2020 even though there were some investors who claimed capital gains deferral on their investment way back in time, which will now mean they get a big tax bill.  I sold my holding in Chrysalis VCT in 2018 as I could see the way the wind was blowing and had been through a similar experience with Rensburg AIM VCT in 2015/16. In that case they did manage to merge with another VCT who took over management of the portfolio.

Both the Edge and Ventus VCTs were not likely to be attractive to merger partners or acquirers though. But an administration process is going to be long-winded, costly and in essence painful.

As I said in the webinar, if you are holding shares in a VCT that is getting into difficulties, or is unlikely to be able to raise new funds from investors, best to get out sooner rather than later. Regrettably the directors and fund managers of such companies seem keen to keep the companies alive, and postpone tough decisions for too long.

Or if you think the VCT is revivable, or can survive, then pursue a revolution such as changing the directors and/or fund manager.

The seminar included a good analysis of the performance of VCTs by Mark Lauber. He suggests they can give a good return if you take into account the tax relief you get from investing in them, and the tax-free dividends. They do provide an alternative asset class to most FTSE shares, being effectively private equity investment trusts investing in smaller companies.

Are they good investments at this point in time? This is uncertain given that the type of companies they can invest in has changed recently. No more asset backed companies for example. They can hold diversified portfolios, but the fund performance depends a great deal on the competence of the fund manager.

There are few alternatives on which you can obtain tax relief. EIS companies are even more risky. With stock markets being buoyant of late, my view is that there are fewer reasons to invest in VCTs at present where management costs are high and corporate governance often leaves a lot to be desired. You also have to keep a close eye on them and understand the complex tax rules. It might be best to wait and see how the new VCT rules work out in terms of investment returns.

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

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The Promotion of Speculation

I was flicking through some TV channels last night and I saw an advertisement for Interactive Brokers Inc. You know the market is getting too speculative when you see they are offering margin rates of as low as 1%, i.e. you can borrow money at that rate to purchase shares.

This is some of what they say on their web site:

“Lowest Financing Costs:

We offer the lowest margin loan interest rates of any broker, according to the StockBroker.com 2021 online broker review.

Earn Extra Income:

Earn extra income on the fully-paid shares of stock held in your account. IBKR borrows your shares to lend to traders who want to short and are willing to pay interest to borrow the shares. Each day shares are on loan you are paid interest while retaining the ability to trade your loaned stock without restrictions”.

That last statement is truly surprising. So it seems you could sell all the stock you purchased on margin even though it has been lent out.

Interactive Brokers (IBKR) is a US listed company with revenues of over $2 billion. They are authorised by the FCA. The fact that they are now actively promoting their services in the UK tells you that the mania for share trading by small investors is spreading from the USA to the UK.

I suggest that buying shares on margin should be accompanied by very strong health warnings to investors and tougher regulations. It was one of the reasons for the collapse of the US stock market in the 1930s. Too many folks geared up with broker loans that were unsupportable when the market headed down. Investors were unable to meet margin calls, and the lenders then went bust.  

Borrowing to speculate on shares is like gambling with other people’s money.

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

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Platform Transfers – “Progress has been pitiful”

There is a very good article in this week’s Investors Chronicle by Mary McDougall on the subject of platform transfers. I have sent her the following email:

Mary,

On the subject of platform transfers, you are quite right to say that “It appears progress has been pitiful”. I have done several such transfers in the past and none has been completed in under 3 months. The FCA initiatives to improve matters has had minimal impact. I am currently still trying to get one completed that I initiated on the 12th of January.

This is a transfer of a SIPP from one platform to another where I already held a SIPP. This was an “in-specie” transfer but it only contained holdings of cash and UK listed Crest shares. No funds or other problematic assets. In other words it should have been absolutely straightforward. But it still required paper forms to be completed and signed. They suggested it would take 12 weeks but I think it will take longer.

The latest hold up is that as I passed the age of 75 in the middle of this transaction the sending platform requires completion of a Lifetime Allowance Test which is also being done by the receiving platform. I am querying why they both need to do it and why that should be holding up completion.

What is really annoying is that both platforms seem to be understaffed to handle transfers, and seem to expect me to do all the chasing required to get the transfers completed. As I have pointed out to them, the FCA Handbook says the brokers “must execute the client’s request within a reasonable time and in an efficient manner”. They are clearly in breach of that rule.

In the meantime, my cash and holdings have been frozen, prejudicing my investment activities.

It is simply unacceptable for transfers to take months. It’s anti-competitive as it deters people from moving to platforms with lower costs or a better service. The FCA cannot fix this problem by exhortation. It needs to look at the wider issue of poor systems and under resourcing of transfers. And it needs to get a lot tougher with the platform industry.

Note that I have not named the two brokers concerned in my latest transfer as I don’t think they are likely to be any worse than others from my past experience. It is an industry wide problem, and needs tackling more vigorously.

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

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Restoring Trust, After Its Long Been Lost

The Government BEIS Department have published a white paper entitled “Restoring trust in audit and corporate governance”. It’s an acknowledgement that the trust of investors in directors who manage the companies they invest in has long ago been lost. And the trust in auditors that the accounts issued by companies are accurate and give a fair view of a company’s financial position has also been lost.

There are few stock market investors who have not been affected by one or more scandals or downright frauds in the UK in recent years. However diligent you are researching companies and checking their accounts, you are unlikely to have avoided them all. Examples such as Autonomy, BHS, Carillion, Conviviality, Patisserie Valerie and numerous small AIM companies give you the impression that the business world is full of shysters while auditors are unable to catch them out. The near collapse of the Royal Bank of Scotland and other banks in 2008 was symptomatic of the malaise that had crept into the accounts of companies that has still to be rectified.

Indeed in the first chapter of my book “Business Perspective Investing” I said accounts don’t matter because they cannot be relied upon. I suggested other aspects of a business that should be examined to pick successful investments and went through them in some detail in the rest of the book. But would it not be better if we could trust company directors and auditors?

The failures of the existing accounting standards and corporate governance, and enforcement thereof, has been recognised in previous Government reviews. For example the Kingman Review in December 2018 made a number of proposals to reform the Financial Reporting Council (FRC) and for a replacement body to be named the Audit, Reporting and Governance Authority (ARGA) with wider powers (see: https://roliscon.blog/2019/03/12/frc-revolution-to-fix-audit-and-accounting-problems/ ). The fact that it has taken 3 years to move one step further tells you about the glacial pace of reform.

The Government has accepted most of the recommendations in past reviews of this area. They plan to tighten up the accountability of company directors and propose “new reporting and attestation requirements covering internal controls, dividend and capital maintenance decisions, and resilience planning, designed to sharpen directors’ accountability in these key management areas within the largest companies”.

The audit profession, who have been one of the barriers to change, comes under attack with these comments: “Central to achieving [reform] is the proposed creation of a new, stand-alone audit profession, underpinned by a common purpose and principles – including a clear public interest focus – and with a reach across all forms of corporate reporting, not just the financial statements. Alongside this the Government is proposing new regulatory measures to increase competition and reduce the potential for conflicts of interest, by providing new opportunities for challenger audit firms and new requirements for audit firms to separate their audit and non-audit practices”.

The Government proposes new legislation to put the new ARGA body on a statutory basis with stronger powers to be financed by a new statutory levy. You may not believe it but the FRC is financed by a voluntary levy and has limited powers over finance directors (none at all if they are not members of a professional body).

There is a new focus on the “internal controls” in a business and proposals to ensure they are adequate. A lack of internal controls is often the reason why fraud goes undetected. These proposals are similar to the Sarbanes-Oxley regulations introduced in the USA.

For investors, a big change that might have an impact is: “Companies (the parent company in the case of a group) should disclose the total amount of reserves that are distributable, or – if this is not possible – disclose the “known” distributable reserve, which must be greater than any proposed dividend; in the case of a group, the parent company should provide an estimate of distributable reserves across the group; and directors should state that any proposed dividend is within known distributable reserves and that payment of the dividend will not, in the directors’ reasonable expectation, threaten the solvency of the company over the next two years”.

There are of course existing rules that should prevent dividends being paid out of capital, which incidentally was one of the common reasons for collapse of companies in Victorian times – the ability to continue paying dividends gave a false sense of all being well to investors. But clearly the current regulations are ineffective. The BEIS report actually says “high profile examples of companies paying out significant dividends shortly before profit warnings and, in some cases, insolvency, have raised questions about its robustness and the extent to which the dividend and capital maintenance rules are being respected and enforced”.

There is also the problem of big bonuses being paid to directors when they should have known the financial position of their company was precarious. This is tackled by new proposed rules to “strengthen malus and clawback provisions within executive directors’ remuneration arrangements”.

There are proposals to reduce the dominance of the “big four” accounting firms and introduce more competition which is seen by some as the reason for the poor quality of many audits. But it is not clear that the proposals will have a major impact.

In conclusion, there are many detailed proposals in the 226 page report, which is now open to public consultation. I may make more comments later, but overall I would support the main proposals as a step forward. I just wish the Government would get on with the proposed changes before investors lose the will to live.

White Paper: https://www.gov.uk/government/publications/restoring-trust-in-audit-and-corporate-governance

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

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The Death of the High Street, and All Physical Retail Outlets

A couple of items of news today spelled out the dire situation of retailers with physical shops, whether they are on the High Streets, in shopping malls or out of town locations.

Firstly chocolate seller Thorntons are to close all their 61 shops and rely on internet orders and partner sales alone.  Thorntons has been a feature of the retail scene for many years but it had been losing money even before the pandemic hit. I did hold the shares for a time when it was a listed company but it is now owned by Ferrero. I even sold the company some software over 20 years ago and remember visiting their factory more than once. It was indicative of changing shopping habits with supermarket sales and local convenience stores taking over from specialist shops for much of their business and with internet sales being the final nail in the coffin. Some 600 jobs will disappear as a result. The vertically integrated structure (both making and selling their products) gave them some competitive advantage but not enough.

Another indication that shoppers have changed habits, and probably permanently, was the announcement from payments company Boku (BOKU) this morning. In their results for the last year the CEO said this: “Industries dependent on face-to-face contact have been decimated. Some – hospitality, for example – will bounce back when restrictions are released, but for others, the pandemic has accelerated pre-existing trends. It turns out that many people didn’t really like driving into town to go shopping and for many types of goods the switch to online will be permanent”.

I hold some Boku shares and although revenue shows another healthy increase, it still lost money last year mainly because of a big write down of goodwill in the Identity Division. One might consider that an exceptional item, although the division is still reporting a loss.

Another interesting announcement this morning was that by Smithson Investment Trust (SSON) which I also hold. In their final results, the fund manager said this: “In the Investment Manager’s view, a high-quality business is one which can sustain a high return on operating capital employed and which generates substantial cash flow, as opposed to only creating accounting earnings. If it also reinvests some of this cash back into the business at its high returns on capital, the Investment Manager believes the cash flow will then compound over time, along with the value of the Company’s investment…….the Investment Manager will look for companies that rely on intangible assets such as one or more of the following: brand names; patents; customer relationships; distribution networks; installed bases of equipment or software which provide a captive market for services, spares and upgrades; or dominant market shares. The Investment Manager will generally seek to avoid companies that rely on tangible assets such as buildings or manufacturing plants, as it believes well-financed competitors can easily replicate and compete with such businesses. The Investment Manager believes that intangible assets are much more difficult for competitors to replicate, and companies reliant on intangible assets require more equity and are less reliant on debt as banks are less willing to lend against such assets.

The Company will only invest in companies that earn a high return on their capital on an unleveraged basis and do not require borrowed money to function. The Investment Manager will avoid sectors such as banks and real estate which require significant levels of debt in order to generate a reasonable shareholder return given their returns on unlevered equity investment are low”.

This formula of ignoring physical assets is proving very successful and demonstrates how the world is changing. I am not quite so pessimistic about real estate companies but certainly those holding retailing assets are surely to be avoided.

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

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Education, Education and Education

Education, education, education” were Tony Blair’s stated priorities for the country in 1997. Note for public speakers – the recital of words in groups of three always reinforces your message – for example, Veni, Vidi, Vici from Julius Caesar. In the current investment world, there is certainly a shortage of education so Blair’s phrase, which became very well known at the time, is worth remembering. Tony considered education was the key to future development in the country and the same applies to the investment world. The best investors never stop learning.

The recent growth in the number of retail stock market traders, particularly in the USA, is of major concern because many of them seem to lack education about the investment sphere. A recent article in the FT suggested that amateur “traders” were transforming markets and is certainly leading to higher volatility. Many such traders (it is doubtful that you should call them “investors”) were using fee-free platforms such as Robinhood and frequently buying on margin (i.e. increasing leverage by borrowing to finance a trade).

The FT article mentioned that in some weeks last year as much as half the trading in Apple was by retail investors, and many who have received cheques from the US Government as part of the economic stimulus in response to the Covid pandemic put the cash straight into the market. New retail investors are moving markets.

But they have a different mentality to traditional retail investors. They are more speculators than investors. As Charlie Munger of Berkshire Hatchaway has said  “The frenzy is fed by people getting commissions and other revenues out of this new bunch of gamblers, and, of course, when things get extreme, you have things like that short squeeze … and it’s really stupid to have a culture which encourages [so] much gambling in stocks by people who have the mindset of racetrack bettors and, of course, it will create trouble, as it did.”

Today I watched a couple of webinars which are relevant to this subject. Firstly I watched the ShareSoc AGM having missed attending the meeting when it took place. As the Chairman said, there is lots of supposed investment education on the web but it is mainly provided by people trying to sell you something. It is therefore good to hear that ShareSoc is putting a lot of effort into developing education materials. It was always the intention of ShareSoc from when it was founded exactly 10 years ago by me and others to provide education for retail investors. It has of course done that in many ways already but some more formalised material is probably needed. It does of course do a lot of good work in other areas such as on campaigns on particular issues. Please do join if you are not already a member – see:  https://www.sharesoc.org/membership/ . There is always more you can learn about the complex world of investment.

Another webinar I watched was the Fundsmith Annual Shareholder Meeting where manager Terry Smith answered questions – see https://www.youtube.com/watch?v=IojZCeUjhRg . His comments at these annual events are always very educational (I do hold the fund). He makes some interesting comments on the events of last year when it was impossible to predict at the start of year what would happen in financial markets. But he still managed to achieve a return of over 18% for the Fundsmith Equity Fund, well ahead of the MSCI world equities index. Two simple tips from him were: don’t take profits but run with your winners, and Return on Capital is a very important financial measure for any company. Of course he has said that before but they are worth repeating.

Terry has some interesting comments on inflation which everyone is worrying about of late. He says pricing power in the companies he owns is important. High return on capital and margins can help to offset inflation. But he gives some interesting data on debit/credit card expenditure and the savings ratio.

He takes another poke at value stocks versus growth stocks. He buys shares in a foggy environment but it’s better to look through the front window rather than the rear-view mirror.  So he does not intend to own any oil and gas companies. He dislikes commodity businesses, and his analysis of car companies suggests he considers them to be of the same nature.

As regards other education the Investors Chronicle often runs good articles of that nature. For example an item on “Finding Hidden Value” by Algy Hall a couple of weeks ago. He pointed out that antiquated account rules have eroded the usefulness of many classic ratios (such as P/Es or Return on Capital). The big problems are intangibles recorded on balance sheets and the fact that a lot of investment never gets recorded but gets written off as an expense. For example, if you launch a new product with a large marketing budget, or open a new office in an overseas territory, there is a lot of expenditure associated which tends to only generate sales and profits in future years. But you will have difficulty convincing your accountants and auditors to capitalise that expenditure.

For high growth companies there is typically a lag between such investments and a good return. So such businesses tend to look poor value on historic financial ratios. As I pointed out in my book Business Perspective Investing, it can be more important to look at other aspects of the business than the conventional financial ratios. Conventional accounts tend to underestimate the value of intangibles such as brands, business partnerships and customer relationships which are so much more important than physical assets in the modern world.

The key is to look at the future prospects of a business rather than just the historic or immediate future financial ratios.

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

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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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