Between 2015 and 2020, just 5% of the world’s initial public offerings (IPOs) took place in the UK. As a result, changes were recently announced by the Financial Conduct Authority (FCA) to encourage a larger number of innovative, founder-led companies to list in the UK.
Among the changes, the use of a ‘targeted form’ of dual class share structures is arguably the most significant. They allow a listed company to have two different types of shares. One, which does not include voting rights, is typically aimed at retail investors. The other, which includes voting rights, is typically held by company founders and directors to maintain their control over decision-making.
Other changes made by the FCA include a reduction in the proportion of shares that must be tradeable on the stock market. This ‘free float’ is being cut from 25% to 10% to allow company founders to maintain a larger share of their business upon listing. In addition, the minimum market capitalisation threshold for main market stocks is being increased from £700k to £30m.
What impact could the changes have?
The changes could encourage a larger number, and wider variety, of companies to list in the UK. Dual class share structures are already in widespread use in the US and in countries across Asia. Therefore, their use in the UK may help to level the playing field and allow London to take a larger slice of the global IPO market.
Indeed, the dual class structure may assuage founder concerns regarding their ability to rebuff a hostile takeover approach. Similarly, founders who wish to retain a large amount of control over the future direction of their business may now be more likely to list in the UK because of the dual class structure.
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Meanwhile, according to the FCA, an increased minimum market capitalisation for main market stocks will “give investors greater trust and clarity about the types of company with shares admitted to different markets.”
Of course, the changes could also threaten governance standards among UK-listed firms. Under a dual share class structure, investors have no say in how their company is run. This could remove an important ‘check’ on how founders or company executives behave. For example, it may encourage ‘pet projects’ that are of little long-term value to investors.
What do the rule changes mean for investors?
The FCA views the changes as a first step in making the UK a more desirable place for founder-led companies to list. Other potential changes being mooted include revised rules on prospectuses to further simplify the listing process.
Clearly, the UK has fallen behind its rivals in terms of its draw for IPOs. There are now 40% fewer companies listed in the UK compared to the peak level recorded in 2008. As a result, changes were very likely to be introduced to try to reverse this trend.
As ever, it remains imperative for all investors to undertake thorough due diligence on any company prior to purchase. The new rules are likely to increase and broaden the range of companies that are listed in the UK. However, whether they improve the quality of listed businesses available to purchase remains a known-unknown.