City business has had cause to take heart in recent days with a clear display of political will behind an overhaul of UK listing rules that could see London shake off its Brexit and pandemic woes and reassert itself as global financial hub.
Proposals set out in the UK Listing Review, led by Lord Hill, will particularly pique the interest of anyone tracking the special purpose acquisition company (SPAC) market. Indeed, the ubiquity of those deals has made them difficult to miss. There has been much talk of London jumping on the bandwagon in a fit of FOMO as other listing destinations, especially the US and Amsterdam, pile into that frothy market with gusto. However, to say that London has been lagging competitors in the US, Europe and Asia for too long is an understatement, and any shake-up to expedite parity with peers hasn’t come a moment too soon.
Capital markets partners generally see the recommendations of the review as striking the right note in tackling the main pitfalls to investors considering the London Stock Exchange as a credible platform for launching SPACs and initial public offerings (IPOs) more broadly.
The main takeaways from the report include modernising listing rules to allow dual-class share structures in the LSE to give founders of the business enhanced voting rights and safeguards around corporate governance. There is also a proposal to reduce free-float requirements — the amount of a company’s shares that are in public hands — from 25% to 15% and let companies use other measures to showcase liquidity.
James Inness, capital markets partner at Latham & Watkins, notes the clear focus in the review’s thinking around technology companies. ‘The UK is seen as a strong destination for incubating and growing technology companies. In many cases, when those companies grow to a size where it makes sense for them to come to market, they look further afield than the UK, with many attracted to the US. This is a response to that; seeking to replicate some features like dual-share class structures that allow founders to maintain control of the company they created for a length of time after listing, which is certainly something we’ve seen in the US with companies like Google and Facebook.’
Importantly, there is also a call for an overhaul of the UK prospectus regime so that admission to a regulated market and offers to the public are treated separately, as well as liberalising the rules around SPACs, including safeguards for investors.
Latham partner Chris Horton hopes the report will prompt the UK to align with more sympathetic structures elsewhere. ‘The main thing that puts people off listing in London is that when you’ve listed a cash sell and you announce a piece of M&A, you have to suspend your shares. In the US or Amsterdam you are free to keep your shares trading the whole time, so if you don’t like the sound of the M&A you can just sell out of the company straight away.’ He also points to Lord Hill’s recognition of the need to build in other protections, providing a mandatory vote on an acquisition and redemption rights on shares.
Many cite the incorporation of a safe harbour for forward-looking information in prospectuses as perhaps the biggest game-changer in attracting tech companies to list, a feature that would give London a competitive edge on its European counterparts. Says Horton: ‘All of our listing rules are built around the last three years. For these fast-growing companies, these are irrelevant. What’s relevant is how the company is going to grow in the next few years.’
Inness agrees: ‘Equity investors are looking for growth, so they’re looking at the future performance of that company. If the UK were the only major jurisdiction that really allowed companies to put that data out, it becomes a very attractive venue to choose because it makes it easier to market it to investors and get your IPO away successfully.’
Meanwhile, Latham corporate partner Anna Ngo is encouraged by signs of long-termism in unlocking London’s potential. ‘What was striking to me about the review is the recommendation that each year there is a report about how the government has achieved its aims in terms of improving the competitiveness of the City of London. It feels like more of an ongoing monitoring of what we’re doing with the City of London post-Brexit, a recognition that the market and the macro market has changed now. That gives me hope.’
Of course, a revolution will not come about just by fixing listing rules – it will require a change in investor mindset. That the UK doesn’t have the same knack for valuing growth companies as the US has become something of a cliché, but much could still rest on investor willingness to take a punt on fast-growing, loss leading, businesses. Indeed, there are already rumblings around an expected push-back from the buy-side to emerge as the Financial Conduct Authority’s consultation takes shape. Either way, it is fair to say that all eyes will be on whether the UK will have the audacity to overcome a notoriously conservative investment culture to grasp this particular nettle.
