The UK Listing Review (the Review), chaired by Lord Hill, published its report on the UK listing regime on 3 March 2021.
The Review was launched by the Chancellor in November last year to enhance the UK's attractiveness as a destination for equity listings and strengthen the UK’s capital markets. The Review sought to address the reported shift of €6.5 billion of deals from London to Amsterdam following Brexit, and the longer term trend of major UK tech companies choosing New York for primary or substantial secondary listings.
Indeed, a central aim of the recommendations is to encourage more technology companies to float in the UK. In his opening letter to the Chancellor, Hill points out that although listing in the UK is a globally recognised mark of quality, "the most significant companies listed in London are either financial or more representative of the 'old economy' than the companies of the future."
In this article we have picked out three changes that we expect to be impactful for tech companies considering a UK listing.
Dual Class Shares
Lord Hill would allow companies with a dual class share structure to list on the premium listing segment of the Official List, subject to certain conditions in order to maintain high corporate governance standards. Dual class share structures allow a shareholder to retain voting control over a company disproportionate to their economic interest in the company. Dual share structures are particularly attractive to the founders of tech companies, allowing them to go public without relinquishing control over the direction of the company, and preventing unwelcome takeovers.
Allowing companies with a dual class share structure to list on the premium listing segment in London may prevent tech companies from choosing to list overseas, in markets such as the US, where dual share structures are common.
The Free Float Rule
Free float refers to the number of shares that are in public hands. The existing requirements for the percentage of shares in public hands are set at 25%. According to the Review, existing Financial Conduct Authority (FCA) rules on free float levels are seen as one of the strongest deterrents to companies when they consider where to list. The Review therefore recommends lowering this threshold to 15% in both the premium and standard listing segments, and allowing companies to use other measures to demonstrate liquidity.
Allowing founders to list their companies while retaining a larger shareholding will enable businesses to progress to Initial Public Offering (IPO) quicker. When coupled with free float changes that accompanied Brexit: the removal of the requirement that the free float be held by investors based in the European Economic Area; investing in UK companies becomes a lot smoother.
Special Purpose Acquisition Companies (SPACs)
Special purpose acquisition companies (SPACs) - are cash shell companies formed with a view to making an acquisition. Investors buy shares in SPACs in anticipation of the management team making a successful acquisition, based on an investment profile described in its prospectus. Current FCA rules can require shares in the SPAC to be suspended when an acquisition is announced. This may be the reason why only four SPACs were listed in the UK in 2020, compared with 248 being listed in the US in the same period. The Review states that:
"there is a real danger that the perception that the UK is not a viable location to list a SPAC is leading UK companies, notably fast-growing tech companies, to seek a US - or indeed EU - deSPAC route for financing"
The Review suggests that current FCA rules around trading suspension are the key deterrent for potential investors in UK SPACs and that amending these rules will encourage investment in UK SPACs.
There have been historic high profile examples of SPACs failing in the UK - including Vallar plc's troubled natural resources investments. However, SPACs are flourishing in the US with high profile recent examples like UK-based electric vehicle manufacturer Arrival taking advantage of a ready-made investor base. Whilst it is still unclear what impact this will have on businesses considering the UK as their listing destination, it may help to address the perception that European markets such as Amsterdam are more flexible than London.
The Review also made recommendations on rebranding the London Stock Exchange's listing segment; an annual report on the state of the City delivered to Parliament by the Chancellor; and reviewing and refocusing the prospectus requirements in the UK.
Speaking about the Review, Lord Hill said:
"The recommendations in this report are not about opening a gap between us and other global centres by proposing radical new departures to try to seize a competitive advantage. They are about closing a gap which has already opened up".
The Government will now consider the recommendations in consultation with the FCA, and set out next steps.
What does this mean for tech companies?
The overarching aim of the Review's recommendations is to increase the competitiveness of the UK listing regime, with a particular focus on attracting more fast-growing technology companies to list in London. The Review's ambition will therefore be welcomed by many operating in the tech sector and beyond.
In a massive boost to the UK tech sector, and UK economy as a whole, The Hut Group completed the largest London stock market listing in five years late last year, and even more recently, we have the news that Deliveroo intends to list in the UK using a dual class share structure. With several other UK tech unicorns expected to now follow Deliveroo to a London listing, there is perhaps reason to be cautiously optimistic for the UK tech industry in the wake of Brexit.