While this proposal will undoubtedly be welcomed in some quarters, equating London with the United States, where such structures are already permitted, advocates of corporate governance will be nervous. They might speculate that there is internal confusion over the idea that it is acceptable for a company with a premium listing to have such a structure for five years, but after that it must either move the segment to keep it, or lose it and become subject to the “proper” rules.
However, as part of the review’s own recommendations, there seems to be another solution to mitigate the risk of companies choosing to list in other public markets – which will eventually be addressed by the introduction of DCSS in the premium segment. Re-launching the standard segment so that its members are eligible for indexing, as suggested in the survey, could solve the problem of travel to other locations, while maintaining the principle of one share, one vote and independence from controlling shareholders.
Since the review was published, Deliveroo has experienced what one banker called “the worst IPO in London history.” It was also reported that at least part of the problem was a “rebellion” by several UK fund managers against the DCSS, which is believed to have influenced the pricing of the IPO. Deliveru’s DCSS contained many of the protections proposed in the survey, and upcoming consultations with the government are likely to provide more details. However, in light of the Deliveroo saga, it looks like some UK investors at least may not be willing to accept DCSS’s level of founder control, no matter what listing category the issuer is in.
Requirements for free circulation
The current free float regime requires 25% of the listed company’s capital to be in public hands. According to the survey, this is keeping some companies from listing, especially those that are backed by private equity or have high growth rates. The proposed amendments are twofold:
- amend the definition of the “stock in public hands” listing rule to be less restrictive in certain areas. For example, raising the threshold for shareholding, above which the shares owned by the institution or investment manager are not in public hands;
- to reduce the required share of shares in public hands from 25% to 15% for all companies in both segments of the listing. At the same time, the review recommended that the Financial Conduct Authority (FCA) establish “objectively measurable” alternative metrics that could be used by companies of different market caps to demonstrate sufficient liquidity where they do not meet the absolute 15% rule. Measures such as the minimum number of shareholders, the minimum number or value of public shares and the minimum share price have been proposed for companies with large market caps, while smaller companies should be able to use the same approach as on AIM and attract An FCA approved broker will make every effort to find a suitable business if there is no registered market maker in the relevant market.
Such changes are likely to be well received by investors and founders looking to hold onto shares at the time of the IPO, when the rigidity of the current rules could lead to earlier sales, sometimes at a lower valuation than would be desirable. … The counterpoint is that companies without a sufficient number of independent shareholders risk becoming closed shops, listed on the stock exchange, where smaller shareholders do not have the number to hold management accountable.
Three-year work experience requirement
In one of the review’s simpler recommendations, Hill suggested that the 3-year premium listing requirement persists after finding insufficient evidence to discourage companies from listing, but that existing R&D provisions have been expanded to include: other sectors … This will allow a wider range of non-revenue companies to demonstrate eligibility in other ways and is likely to be a welcome move.
Historical financial information
The review was relatively harsh about the premium listing requirement for historical financial information covering 75% of the issuer’s business, calling it a “gross instrument” and “useless.” In another simple recommendation, the review recommended that the 75% criterion be applied only to the most recent historical financial period as part of the three-year track record requirement.
Such an amendment could open a premium listing for companies that have grown significantly through acquisitions and could facilitate IPOs as a realistic exit proposal for more platforms to buy and build private equity that might otherwise struggle to meet this requirement. … …
Prospect mode and forward-looking information
The review proposed “to rethink what the UK prospectus regime should look like”. The effect of re-screening may affect existing listed companies more than potential listing candidates. The review noted that very little feedback was received on the content of IPO prospectuses beyond the willingness of respondents to include forward-looking recommendations and that the regime is “onerous” for smaller issuers.
In terms of forward-looking information, the review examined the prospectus liability regime and its impact on directors’ willingness to post such information in prospectuses. It states that the market practice of companies and their consultants checks the reports of connected analysts for actual accuracy and the interaction of this information with the prospectus itself is ineffective and unsatisfactory. The review suggested that the Treasury should consider amendments to the Financial Services and Markets Law to adjust commitments related to forward-looking financial and other information.
The details of these legislative amendments will be of great interest and will begin to be clarified during consultations this summer. One suggested solution is protection for directors who can show that they have exercised due care, skill and diligence in gathering information and can demonstrate sincere belief in its truth. The practical implications are likely to be the additional consulting costs associated with preparing, verifying and justifying the information included in the prospectus. Perhaps companies feel that this is the price to pay for being able to communicate their business plans directly to investors.
Hill did not directly seek feedback on the rules for reporting to unconnected analysts and the changes to the IPO schedule introduced in 2018. However, his review noted that “numerous market participants and consultants” expressed the view that the rules put London at a disadvantage. disadvantage compared to other listing venues due to increased execution risk due to a longer public phase, increased costs and practical issues, while not providing any practical benefit.
The review recommended that the FCA be held accountable for improving the competitiveness of the London market. Such a fee could affect regulation. For example, with the introduction of the 2018 rules, the FCA’s goals may well have been well-intentioned, but it can be assumed that the changes would not have been implemented if the FCA had challenged the implications of a longer deal timeline.
Standard listing with rebranding
In addition, the review also argues for rebranding the standard listing segment along with revamping the indexing criteria to develop an updated and flexible regime that has real appeal.
Lack of index compliance is a significant obstacle to the standard listing we see in practice, but Lord Hill was relatively vague about what this new segment would be other than “flexible”. The goal appears to be to create a viable alternative to the cost and rigidity of the premium segment that will develop its own best practices depending on the context of the company and its investors, always subject to FCA minimum standards for eligibility. This is an interesting proposition, but it, at least in the short term, could create some uncertainty as this market practice takes hold.