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Listing badly or desperately needed flotation aid?

A shake-up of London's listing rules was proposed this week. The Financial Conduct Authority (FCA) will have to strike a balance between attracting new companies to London and protecting investors

THG PLC -

Proposed changes to London’s listing rules announced this week have played a vital part in persuading Deliveroo to list in London.

Deliveroo intends to use a “time-limited dual-class share structure” to ensure its founder, Will Shu, retains control of the company when it goes public.

Deliveroo said the dual-class share structure would give Shu the “stability to take decisions to enable the company to execute on its long-term strategic vision in order to create long-term shareholder value”.

The dual-class structure would be in place for three years, which is actually a shorter duration than would be allowed should the City adopt recommendations on listings rules published this week by Lord Hill, the former European Union commissioner.

Proposed changes to London's listing rules

Lord Hill was asked to lead a review of London’s listing rules and he made the case for changes to be made, saying that although the Official List has historically been globally recognised as a mark of quality for companies, between 2015 and 2020 it accounted for just one in 20 of flotations globally.

The number of listed companies in the UK has fallen by about 40% from its peak in 2008 while since Brexit was finalised, there has been increased concern about Amsterdam and other European financial centres siphoning off business from London.

Lord Hill also highlighted that the constituents of the FTSE 100 are overwhelmingly representative of the “old economy”, with technology giants decidedly thin on the ground.

As such, Deliveroo, if it achieves its presumed market capitalisation of £7bn or £8bn, would be a shoo-in for inclusion in the FTSE 100 but only if the rules are changed. THG PLC (LON:THG), with a market capitalisation of £6.9bn, has been excluded from the FTSE 100 because of its dual-class share structure and the same exclusion would apply to Deliveroo.

There is reportedly a host of other technology companies looking to go public and London would dearly love them to choose to list here but the City’s distaste for dual-class shares, where the founders control a majority of the voting rights but not necessarily a majority of the shares, has proved a deterrent to technology companies, whose founders tend to be keen on keeping their hands on the tiller.

Hill recommended that companies with dual-class share structures should be allowed to list on the premium listing segment of London but stipulated that the “A” shares and “B” shares should be merged after a maximum of five years.

Lord Hill also proposed that the super-power of the “B” shares should only be used in votes relating to the composition of the board and to block changes in ownership of the company.

Another recommendation of the report was that the “free float” requirement, which is essentially the percentage of shares that are not held by committed long-term shareholders, be reduced to 15%.

Perhaps most controversially, Lord Hill’s report recommended loosening restrictions on special purpose acquisition companies (SPACs), often referred to as “blank cheque” shell companies.

Race to the bottom

As one might expect, some are in favour of the proposed changes while others warn of a dangerous dilution of London’s reputation as a highly-regulated financial centre.

“Allowing SPACs doesn’t seem like a battle worth having even if past experience of shell companies, their closest equivalent in the UK, is that they tend to attract chancers and abstract wealth from shareholders. Provided there is proper disclosure, caveat emptor ought to apply,” suggested Ivan Sedgwick, the investments director at LGB & Co.

“Calls upon the FCA [Financial Conduct Authority] to loosen listing regulations, especially for SPACs, should be treated with caution,” declared Russ Mould, the investment director at AJ Bell.

“SPAC deals may be booming in the USA right now, but fear of missing out (FOMO) is just about the worst possible reason for making any investment decision. To let this emotion drive a change in the rules with regards to SPACs in particular would potentially expose investors to greater danger and the risk of portfolio losses. Yes, the rules may make it easier for the entrepreneur to raise capital but is what is good for the seller, necessarily good for the buyer?” Mould asked.

Catherine McGuinness, the Policy Chair of the City of London Corporation, welcomed the recommendations in Lord Hill’s review.

“We need to do more to attract IPOs, especially from entrepreneurial and fast-growing sectors such as tech – while, of course, maintaining high standards of governance and transparency,” she said.

“We are facing increasing competition in attracting fintechs, and technology companies more generally, to list. Ensuring that as many of these firms stay in the UK is vital for our fintech sector and for our economy. More than a third of privately funded UK fintechs expect to undertake an IPO in the next five years and are currently considering their options for listing. It is vital that we ensure that listing in London is an attractive option for these companies,” she added.

Certainly Rishi Sunak, who began his City career at Goldman Sachs, seems inclined to accept Lord Hill’s recommendations and has promised to act quickly on the proposals.

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