Listing Regime Rule Changes: The first step is always the hardest

Previously, companies using "dual class" share structures, which assist founder directors to maintain control of a company post-listing, were only able to list on the standard listing segment: for example, THG, Deliveroo, Oxford Nanopore and S4 Capital (listings with which Travers Smith was involved) make use of such a structure.

The rule changes allow for certain limited dual class structures to be listed on the premium segment of the main market. This will enable a company with a dual class structure, at least currently, to be included for the first time in market indices such as the FTSE 100 and FTSE 250. This is significant, as passive investors invest in such companies on these indices indirectly through tracker funds.

However, there are some important caveats to the approved dual class share structure change:

(i) the maximum ratio of voting rights for the 'enhanced' shares versus ordinary shares is 20:1. This means that a founder shareholder will need to hold at least 4.7% of the issued share capital in order to block an ordinary resolution and effectively maintain control of an issuer – if an issuer has been through multiple series of investment rounds prior to IPO, this may have diluted a founder director below such a threshold;

(ii) the enhanced voting rights may only apply in respect of resolutions relating to (i) the removal of the founder as a director and (ii) any vote following a change of control i.e. a takeover. In practice, this means that the level of protection provided to a founder director is extremely limited. This is in contrast to the US and some of the above standard listing examples, where the 'golden share' and other dual class structures are well-established and investors are comfortable with founder directors retaining significant control over a company post-listing; and

(iii) these rights must have a 'sunset' provision whereby they expire 5 years from the date of listing.

The FCA has been trying to find a 'Goldilocks' approach; however it remains to be seen whether these changes are sufficiently balanced. It also remains to be seen whether the FCA will amend the rules further at a later date. The FCA has stated that it will, "engage further with market participants to discuss specific issues and ideas raised."

Some key questions remain to be determined in practice:

• Will the change be significant enough to entice founder-led businesses to list on the premium segment of the London Stock Exchange rather than e.g. a standard listing or the US, where a dual class structure is both less restrictive and more widely accepted?
  
  
• Will these changes be unpalatable for other institutional investors? Whilst much of the commentary around UK listing reforms has focused on reducing what some see as regulatory burden, one of the many reasons that the UK is well-supported by a strong investor base is the empowered regulatory oversight, governance and disclosure requirements.
  
  
• Will the FTSE and other market index producers accept dual class structured issuers into their indices? If so, what impact will this have on passive investors (who invest in tracker funds)?

The percentage of an issuer's issued share capital required to be "in public hands" has been reduced to 10%. The FCA noted that the previous free float level of 25% may have created a barrier to listing in the UK compared with other jurisdictions with more flexible approaches. For example, almost a third of IPOs in Amsterdam since 2010 had a free float of less than 25%. Amsterdam also treats all institutional fund investors as part of the free float in contrast to the UK which excludes them if they hold greater than 5%.

There was some debate in the consultation around whether the changes would impact the liquidity of listed shares and the FCA went to lengths to set out its justification for the reduction. In particular, it noted that the free float changes should be viewed alongside the changes to the minimum market capitalisation (detailed below), which in the FCA's opinion should help to ensure sufficient liquidity.

Our view is that, whilst there will inevitably be some impact on liquidity in traded shares as a result of the reduced free float requirements, it is important to remember that the old 25% threshold itself was only fully implemented on 1 January 2014, and there is only modest evidence that such an increase also increased liquidity. The impact for mid-cap and larger issuers is therefore likely to be relatively limited.

Furthermore, and as the FCA itself has noted, average free floats in the UK at IPO have historically been significantly higher than 25%. It is therefore unclear the extent to which this change will have a significant impact in encouraging issuers to list in the UK rather than elsewhere.

The minimum market capitalisation of an applicant to the standard or premium segments of the Official List has been increased to £30 million. Although this is significantly below the £50 million minimum on which the FCA had consulted, it represents a significant rise from the historical £700,000. It has been confirmed that this will continue to apply on admission only and not as a continuing obligation.

One of the key drivers behind this change was the prevalence of high share price volatility and suspected suspicious trading in small-cap issuers. It is hoped that increasing the minimum market capitalisation will require issuers to reach a certain level of maturity before listing on the main market, which will better enable them to comply with the ongoing requirements of being a listed business.

Whilst the objective to ensure applicants for a main market listing are of sufficient quality and maturity is to be welcomed, it should be noted that a number of large and successful companies have commenced life on the London Stock Exchange as small cash shells, raising money only once the target business was known and as such a qualitative test may have been appropriate. We welcome the FCA's offer to engage further with market participants on this issue and to further consider proposals for sponsor-backed small cash shells to remain eligible for listing.

The FCA highlighted that it intends to provide further feedback on the overall structure of the UK listing regime in the first half of 2022, including a suggestion of potential further reforms and rule changes to improve the UK's long-term effectiveness and competitiveness.

In addition, we await the outcome of the Treasury's Prospectus Regime Review (see our briefing). We could see a radically altered ECM landscape by the end of next year.