Much is happening in the world of listed company regulations, with proposals that take advantage of the post-Brexit ability to relax IPO criteria.
Dual Class Companies
A commonly cited reason for UK tech companies choosing not to list in London is that founders fear the loss of control on going public. For some time it has not been possible to list a dual class share structure on the Main Market of the London Stock Exchange; i.e. where a second class of shares are not listed and have weighted voting rights. Although Schroders, Hansa and Daily Mail have all historically listed dual class structures, for a long time now the UK the corporate governance mantra has been 'one share, one vote'. However, this can be done on the US, Hong Kong, Shanghai or Singapore markets: Google and Facebook both have dual class structures giving their founders control, but neither company would be able to list on the premium segment of the Main Market.
The key advantage of a dual class company is the ability for the founders to retain control even if their economic rights become diluted, and to use that control to decide who manages the company, to therefore control its strategic direction and to be able to resist a takeover, which is a particular risk in the early loss-making years.
It is possible to float a dual class company on the LSE's standard segment of the Main Market (e.g. Deliveroo in April and Wise in July) or on AIM, but those markets have fewer investor protections and are less attractive to many institutional investors. For example, standard list companies are not tracked by the FTSE indices which rules out many fund investors. To respond to this, one of the FCA's proposals is to permit weighted voting rights (up to a 20:1 ratio) on the Main Market for five years post IPO, but only on resolutions that seek to remove the founder director who holds those weighted voting rights, or on resolutions that follow a change of control (i.e. to act as a disincentive to an opportunistic takeover approach). In parallel, there are also proposals to reduce the free float requirement from 25% to 10% and to raise the minimum market cap on IPO from £700k to £50m, for both premium and standard listings. The FCA consultation closes mid-September with rules likely to be set by the end of the year.
Special Purpose Acquisition Companies, or SPACs, were mainly a US bubble in 2020, floating with no business save for a strategy to acquire private companies and with access to a war-chest of committed funds held in a third party custodian/trust account. Arguably their popularity rose because institutional money struggled to find their usual homes in PE and investment funds during the height of the pandemic. NASDAQ is the market of choice for SPACs and it was clear that the UK was not seeing an equivalent spike in the activities of its version of a SPAC, the cash shell company. As a result, the FCA is amending the listing rules from 10 August to make the UK listing of a SPAC more attractive. The key rule change is to remove the previous presumption that upon the announcement of a reverse acquisition trading in the shares must be suspended. The suspension was to protect investors who wouldn’t have full information on the proposed acquisition, but being locked out of the market at this time was also a frustration to many who considered this the raison d'etre of their investment. The new rules will permit trading to continue if the SPAC has raised at least £100m at the time of flotation (not including founder/sponsor funds) and that money is also monitored to ensure it is only used for acquisition purposes and limited operational purposes. If the SPAC hasn’t made an acquisition within two years (or, with shareholder blessing, three years) then it must cease operations and return the funds. In addition, the new rules will also require: (i) a shareholder vote (not including the founder/sponsor) to approve an acquisition, (ii) the directors to issue a fair and reasonable statement (supported by independent advice) where one of its directors has a conflict of interest with the target of the acquisition, and (iii) that shareholders have a redemption option, such that they can sell their shares if they are not supportive of the acquisition.
By comparison, on AIM SPACs are called investing companies and must raise £6m on IPO. If they haven’t found an acquisition within 18 months then they must seek annual shareholder approval to continue. If an AIM company sells its trading business and assets it becomes a 'cash shell' and must either effect a reverse acquisition within six months, re-admit itself as an investing company or de-list.
The UK regulators are clearly keen in a post-Brexit world to ensure that the UK stock markets remain competitive. The rule changes for SPACs and the proposals for dual class companies will have some impact but there is a difference between trying to encourage UK business not to list overseas, and attracting overseas business to list in the UK.
International companies can be more sensitive to many other factors when considering where to list, including the tax environment or the strictness of our Takeover Code. US SPACs are also facing tougher regulations from the SEC - far fewer new SPACs are listing and there is a significant backlog of unspent SPAC money that is looking for an acquisition before the time comes for it to be returned. The FCA therefore seems to appreciate that they should not be overreacting to the SPAC boom, but that they still need to remain current. Indeed, the FCA is also consulting more fundamentally on whether the choice to list on the premium or standard segments of the Main Market is still fit for purpose: Should both segments be retained? Is there a need for a new segment altogether? The consultation is not concerned with listing on AIM, which after some very quiet times appears to be returning to rude health with the 35 IPOs in the first six months of 2021.
The recent listing of Wise on the standard listing segment of the LSE is also noteworthy, not only because of its dual class structure and valuation (£9bn) but because it was a 'direct listing'; i.e. where a company doesn’t need to raise funds and so does not offer new shares in an IPO, but instead sells existing shares to the public. This is a simpler way to go public, and avoids lock-ups and also the risk of mispricing which can arise in the usual book-building process where institutional investors set the price in advance of knowing how the wider market is going to react. This route will probably only be relevant to very few companies with cash reserves and high brand recognition (e.g. Spotify and Slack in the US), but the Wise listing does provide proof that London can still be attractive to a large Fintech company, even without changing the rules.