The FCA has rolled out its listing rules reforms in a move that aims to reinvigorate the UK’s ailing capital markets. But will the changes be enough to make up for more than a decade of sluggish performance?
‘The FCA has not implemented such a wide set of revisions on over three decades’, says McDermott corporate partner Michal Berkner. ‘They have made a material attempt to streamline the rules – but does it go far enough? That remains to be seen; the proof is in the pudding.’
The list of major changes is striking. The division between the premium and standard sections is gone. Both natural persons and institutional investors can hold super voting rights under dual-class share structures (DCSS). And related party transactions and large transactions other than reverse takeovers no longer require compulsory shareholder votes.
Many of the reforms have been welcomed. The demise of the premium-standard distinction in particular has not been mourned. ‘For a long time there’s been a lot of confusion and criticism of the division between the premium segment and the standard segment’, says Skadden European capital markets head Danny Tricot. ‘The standard segment was seen as the poor cousin of the premium segment, but the premium segment was harder to get listed on than other markets around the world. As a result, neither market was fulfilling its full potential.’
Partners also pointed to the impact of the relaxed rules on dual-class share structures. ‘Startups will be particularly interested in dual-class shares and the removal of track record and eligibility requirements, which will really help encourage those early-stage companies to think about accessing the public markets earlier than they might otherwise have done’, says Herbert Smith Freehills corporate partner Michael Jacobs.
He continues: ‘Dual-class shares were a big feature of the UK market for many years, but they slowly dwindled away. In the US, however, this structure has continued to be popular with companies like Google and Facebook convincing investors to support them. There is empirical evidence to suggest that dual class shares can benefit investors because the founder has the time to execute their vision and achieve better returns.’
Tricot agrees: ‘The change in the controlling shareholder regime is really significant, and is likely to attract founder-led companies that might otherwise have been put off by London. If you’re a founder with control used to running your business as a private company, the changes to those aspects of the rules will make a London listing more attractive.’
‘The US comes at controlling shareholders from a completely different perspective. The UK approach was to say: “if you have a controlling shareholder, they exert too much power and therefore the minority shareholders are prone to abuse”. In the US, if you have a controlling shareholder, there are certain requirements that actually get softened. The rationale for the US approach – which the UK has also now shifted to – is that, so long as you give investors proper disclosure on the rights of the controlling shareholder and what it means for their investment, then it is up to them to decide if they want to invest.’
But partners also acknowledge that the relaxed rules come with an element of risk. In addition to lighter regulation on dual-class share structures, the new rules also stipulate that large related party transactions no longer require shareholder approval. HSF managing partner for corporate and UK corporate head Mike Flockhart comments: ‘In both areas, a decision has been made to expose investors to more risk because the benefits of doing so are perceived to outweigh the negatives. The benefits include attracting more companies to the market, making the market more vibrant, and allowing listed companies to transact without the impediment of needing shareholder approval. The FCA, having weighed the evidence very carefully, has come out in favour of a more liberal regime.’
Some buy-side reactions have been negative, and the FCA has acknowledged investor opposition to the changes. But partners argue concerns about a race to the bottom are misplaced: investors have long put their capital into exchanges with far lower levels of regulation than even the new relaxed London rules, and it was the UK that broke with practices around the world and in Europe to set higher regulatory standards. ‘The areas where the UK has softened the requirements are ones where the requirements were generally not perceived to be giving shareholders or investors significant additional protections in practice anyway’, says Tricot. ‘There aren’t many deals that fail as a result of shareholders voting them down. The effect of the old rules was that UK public companies were less competitive than other companies when bidding for a significant acquisition since they were required to condition their bid on obtaining shareholder approval.’
For Jacobs, the potential upsides are well worth the additional risk: ‘Some of the phrases we’ve heard include “there’s no point in having the world’s best-regulated graveyard,” where the FCA acts as a gatekeeper, allowing only complete blue-chip stocks to list. Actually, that’s not great for pensioners or anyone because investors need a broad spread of companies to invest in. Inevitably, there will be corporate failures, but capitalism is inherently a risk-based system. Failure is a feature, not a bug, of the system, so it should be encouraged.’
Latham & Watkins corporate partner Mark Austin has served on the Capital Markets Industry Taskforce (CMIT) since it was founded in 2022 by London Stock Exchange CEO Dame Julia Hoggett. In his view the UK has become ‘too conservative’ in its attitude towards risk. ‘We need to be risk-on rather than risk off as a financial services sector’, he says. ‘Otherwise, you put the stabilisers on and never take them off, but that means you’re missing out on growth.’
However, even those who welcome the changes note that their impact may take some time to be felt. ‘These new rules will not change things overnight’, says Tricot. ‘Companies have known the new rules are coming, and even the detail of most of the new rules, for over six months now. If you wanted list in the second half of this year, you would already have been planning it for the last few months – you wouldn’t suddenly kick into action the day after the new rules are published.’
Berkner similarly notes that the problems affecting UK capital markets run deeper than the regulatory burdens of listing: ‘When a company considers where to list, it will consider the listing rules and the ease and cost efficiency of being a public company in a particular jurisdiction. However, a major factor in this decision is where they believe they can raise the most money over time. This second aspect isn’t necessarily addressed by the new rules.’
Austin concurs: ‘This might not be a factor that causes companies to pick the UK over another jurisdiction, but it’s another necessary factor that, overall, makes the UK listing regime and the UK financial capital markets very attractive as a capital market.’
Moreover, Austin argues that a US listing may no longer be the gold standard that it is sometimes presented as: ‘The penny seems to have dropped that if you’re a smaller company and you’re not going to be a foreign private issues in the states, ie. not a domestic US issuer, it may well not be the best market for you to be on.’
IPO markets have been quiet around the world in recent years. London in particular has suffered from low levels of activity. But 2024 brought positive signs. Kazakhstan airline Air Astana completed its listing in March with a valuation of $847m and roles for Dentons advising Air Astana Joint Stock Company, White & Case advising a syndicate of banks, Fieldfisher advising the Kazakhstani Sovereign Wealth Fund, and Freshfields advising BAE Systems. In June, Raspberry Pi listed, advised by Linklaters – and saw share prices shoot up from an initial £541.6m market capitalisation. All eyes are now on a potential IPO from Shein.
The hope is that the new rules will best position the UK to ride a rising wave of market activity. ‘ECM markets should pick up’, says Tricot. ‘Even without the new rules, I think we are well past the bottom of the cycle. The market is trending upwards. We should see the benefit of the new rules in the context of a market that’s opening up.’
Still, partners agree that more needs to be done. In particular, they identify the pension system as an area in need of further action. ‘Adequate pension provision is essential’, says Jacobs, ‘potentially existential given the demographic trends in the UK and beyond. It is imperative that it be reformed, and this reform could be quite radical.’
New chancellor Rachel Reeves announced a sweeping pensions review on 20 July, which Jacobs says indicates ‘significant scope for radical change’. ‘This could involve directing capital away from fixed income into the public and private equities markets which would help UK companies scale and grow and generate higher returns for pensioners. The retreat of UK investors, including pension funds, from equities markets mean that many UK PLCs are owned by overseas investors. While this isn’t a problem in itself, it means that UK investors aren’t necessarily benefiting from returns generated.’
The rule changes are a step in the right direction. But the road ahead is long. And as this week’s stock market tremors in New York, London, and especially Tokyo show, economic stability can never be taken for granted. Regulatory changes are one small part of the picture – but partners agree that even a marginal benefit is better than a burden.
Austin offers a persuasive summary of the argument in favour of reform: ‘We say in the legal profession that hard cases make bad law. Too often in the past 10-20 years, we’ve legislated and regulated by reference to guard-rail cases and changed the system to ensure it wouldn’t happen again. You have to take a more pragmatic view: if you put rules in place to ensure you won’t lose any money, you won’t make any money either.’
alexander.ryan@legalbusiness.co.uk
