Alongside the Budget announcement on March 3rd, Rishi Sunak published the findings of a 5-month independent review into the UK public listing regime, headed by ex-financial services commissioner for the EU, Jonathan Hill. The review has called for an overhaul of the UK’s listing rules to enable London to compete against rivals like New York and to capture the benefits of the continuing popularity of SPACs. Hill believes the UK can capitalise on its newfound post-Brexit freedom to “move faster, more flexibility and in a more targeted way”. As Sunak consults the recommendations of the report, he must consider, as many fear, the risk of compromising corporate governance and shareholder protection in the UK.
Declining role of London
The attractiveness of listing publicly in London has fallen in recent years, as technology IPOs and recent trends in capital markets have favoured other global financial centers. Over the last 5 years, London accounted for only 5% of global IPOs and since 2008, the number of companies listing publicly in the UK has fallen by 40%. 2019 marked a 10-year low in IPOs on the London stock market, and last year only two IPOs exceeded £1bn valuations. London has struggled to attract fast-growing companies from modern sectors like technology and life sciences, including such firms that were founded in the UK. Most recently, UK technology firms Babylon, Darktrace and Cazoo have reportedly discussed listing publicly in the US through SPACs. The rules surrounding New York IPOs and SPACs have enabled the city to raise more than $38bn through SPACs in 2021 alone, with Frankfurt’s and Amsterdam’s first SPAC listings taking place last month.
UK listing rules differ to US and Hong Kong rules in three main ways, which helps to explain this geographical trend in listings.
Firstly, the US and Hong Kong allow companies to list shares that carry different voting rights. Known as dual-class shares, these shares can be offered to different stakeholders, with share classes containing no voting rights issued to the general public for example. This is highly attractive to entrepreneurs and founders. The UK on the other hand, has a simple ‘one share, one vote’ principle for London premium listings. Hill proposes that the UK allows dual-class share structures in premium listings.
Secondly, the UK’s free float rules requires listed companies to have at least 25% of their shares in public hands, compared to the US’s 10%, deterring fast-growing companies that want to retain control. Hill believes that London should operate the middle-ground between the two values at 15%.
Finally, UK rules around SPACs are highly restrictive. UK rules require a SPAC’s shares to be suspended once a target is chosen, until a deal prospectus is published. It prevents SPAC shareholders, who dislike the target, from selling their shares in this period, which is highly unappealing for founders as it leads to lower valuations, lower retail investor and interest. Hill views the London lock-ups as highly unnecessary.
What would this mean for the UK?
If the UK were to undertake the free float and dual-class shares suggested, the UK would become a more attractive location for fast-growing tech and other modern companies to list, incentivising owners by the greater possibility of retaining more control of the company and thus greater protection from hostile takeovers. Deliveroo’s recent decision to target a $10bn IPO in London following Hill’s proposals highlights this. Although the rules will not likely come into force before Deliveroo lists, the company has said that its dual-class structure will be “closely in-line” with Hill’s proposals. This will enable the company to move up to a premium listing from the standard market once the rules come into play. As the rules are considered and integrated by Sunak, the UK will hope such changes will enable it to better retain UK-grown businesses like Deliveroo that represent a “true British tech story”.
However, many believe that the UK should not use shareholder protections as a bargaining chip to attract firms to list in London. There are concerns that reducing the free float requirement and enabling dual-class structures will sacrifice corporate governance standards for example, as founders are able to retain control of the company without equal treatment of shareholders according to economic exposure.
There are also arguments that the UK should avoid joining the SPAC craze. The sheer number of SPACs that have listed has raised concerns of an asset bubble. The FT has shown that 60% of SPACs listed between 2015 and 2019 now trade below the $10 standard SPAC listing price. When interest rates eventually start to rise, if the hype around SPACs were to stall, although it wouldn’t threaten the broader financial system, retail investors who backed failing SPACs would stand to lose out. There are also concerns raised about the transparency shortfalls surrounding SPACs, as highlighted by the accusation leveled at Nikola Corporation’s false marketing. In the words of Russ Mould, an investment director at AJ Bell, “SPAC deals may be booming in the USA right now, but fear of missing out is just about the worst possible reason for making any investment decision”.
Overall therefore, Sunak is presented with a challenge. Changes to London listing rules certainly offer benefits and potential for the City to compete with the likes of Hong Kong and New York, and better retain UK-grown firms, and better attract technology and other high growth firms. Sunak however, must consider the risks such changes present to corporate governance standards, and investigate regulations that could balance the benefits and risks of such rule change.