Comment: Hope hovers for a revision of the city listings, but American audacity is vital
Business in the city has been encouraging in the past few days as the political will behind a revision of UK listing rules has emerged that could cause London to shake off its Brexit and pandemic troubles and assert itself again as a global financial center.
The proposals contained in the UK Listing Review, led by Lord Hill, will in particular arouse the interest of all those following the SPAC (Special Purpose Acquisition Company) market. In fact, the ubiquity of these businesses has made them difficult to miss. Much has been said about London jumping on the bandwagon in a fit of FOMO while other listing destinations, particularly the US and Amsterdam, are piled up with gusto into this foamy market. To say that London is too long behind its competitors in the US, Europe and Asia is an understatement, and any move to speed up peer-to-peer parity hasn’t come too soon.
Capital market partners generally see the review’s recommendations as pertinent when it comes to addressing the key issues for investors who view the London Stock Exchange as a credible platform for launching SPACs and broader IPOs.
One of the key takeaways from the report is the modernization of listing rules so that the two-tier stock structures in the LSE can provide the founders of the company with enhanced voting rights and governance protections. There is also a proposal to reduce the free float requirements – the number of shares in a company that are in public hands – from 25% to 15% and allow companies to take other measures to show liquidity.
James Inness, capital markets partner at Latham & Watkins, points out the clear focus in the review’s thinking in relation to technology companies. ‘The UK is seen as a strong destination for tech companies to start and grow. In many cases, when these companies grow to a size where it makes sense for them to enter the market, they look further afield than the UK and many are drawn to the US. This is an answer to that; We want to replicate some features like dual share class structures that allow founders to maintain control over the company they started for an extended period of time after being listed. We have certainly seen this in the US with companies like Google and Facebook. ‘
It is also important that the UK prospectus regime needs to be revised so that admission to a regulated market and offers to the public are treated separately, and that the rules for SPACs, including protections for investors, are liberalized.
Latham partner Chris Horton hopes the report will encourage the UK to join more sympathetic structures elsewhere. “The main thing that keeps people from listing in London is that once you have listed a cash sale and announce a piece of M&A, you have to put your shares on hold. In the US or Amsterdam, you can have your stocks trading all the time. If you don’t like the sound of the M&A, you can sell the company right away. ‘He also notes Lord Hill’s appreciation of the need to put other safeguards in place by making a mandatory vote on a right to buy and redeem shares.
Many cite the inclusion of a safe haven for forward-looking information in prospectuses as perhaps the greatest trailblazer in attracting tech companies to listing, a trait that would give London a competitive advantage over its European counterparts. Horton says, ‘All of our listing rules are based on the past three years. For these fast-growing companies, these are irrelevant. It is relevant how the company will grow in the next few years. ‘
Inness agrees, “Stock investors are looking for growth, so they look at the future performance of this company. If the UK were the only major jurisdiction where companies could really publish this data, it would be a very attractive place to choose as it will be easier to market to investors and successfully complete your IPO. ‘
Meanwhile, Latham corporate partner Anna Ngo is encouraged by signs of long-term thinking in unlocking London’s potential. “What I noticed about the review is the recommendation that a report be published each year on how the government has achieved its goals of improving the competitiveness of the City of London. Rather, it appears to be an ongoing monitoring of our post-Brexit activities with the City of London, a realization that the market and macro-market have now changed. That gives me hope. ‘
Of course, a revolution will come not just through the establishment of listing rules, it will require a change in investor attitudes. That the UK doesn’t have the same talent for valuing growth companies as the US has become a stereotype, but much of it could still be based on investor willingness to get involved with fast-growing, loss-making companies. Indeed, rumors of an expected buyback pushback are already emerging as the Financial Conduct Authority consultation takes shape. In any event, it is fair to say that all eyes will be on whether Britain will have the audacity to break a notoriously conservative investment culture to capture this particular nettle.