A recent article in the Financial Times argued in favor of easing listing regulations in the UK, with the hopes that foreign companies are attracted to markets such as the London Stock Exchange for their public offerings. This article will consider the arguments made by Lorna Tilbian and illustrate why the UK is better off with its current listing regime.
The main points of contention lie in the strict rules with regards to the minimum requirement for the free float and the lack of the dual-share structure in the UK.
Free Float: A compromise for long-term stability?
Free float refers to the number of a company’s outstanding shares owned by public investors. This is an important factor for potential investors as it provides insight into the company’s stock volatility. The UK currently requires companies to have 25% of their shares be held by public investors, i.e. the free float requirement is 25%. This is significantly higher than the free float requirements in other comparable jurisdictions, such as the United States, where the float minimum requirement is 10%.
The concern for British-listed companies is that they will not be able to retain significant equity after the initial public offering, and early investors may be concerned about dilution. Moreover, founders of a company, especially technology enterprises, may be attracted to listing on American markets like the NASDAQ index as this enables them to gain a “premium” listing. This is problematic for the UK economy as it moves jobs, as well as tax revenues, abroad.
However, the higher free float requirement in the UK is not all bad. As noted earlier, a company’s free float is used as an indicator of its volatility, with volatility and volume of the free float being inversely proportional, meaning the lower the free float, the higher the stock’s volatility. This is due to a variety of factors, but most crucially due to the limited number of shares available for trading.
As a result, it is general practice for traditional institutional investors to invest in companies with a larger free float as their trading will not have a significant impact on a stock’s price. Therefore, for companies in the UK to attract institutional investors, it may be valuable to stick with the current listing rules in place. Moreover, higher free float requirements also guarantee significant liquidity.
Dual-class share structure: What is it? Has the UK got it right?
In the UK, companies can not offer different classes of shares with varying voting rights to investors. In contrast to this are the listing regimes of jurisdictions like the United States and Hong Kong, which allow for various classes of shares with different voting rights to be issued. The latter system of share structures is known as a dual-class share structure.
Commentators argue that the dual-class share structure is an important mechanism to insulate the founders of companies from Wall Street’s short-term investment strategies. Founders often have a long-term vision for their companies, and make strategic decisions in line with such goals, rather than base their decisions solely on quarterly earnings reports. During economically unstable quarters, which are often unpredictable as evidenced by the Coronavirus pandemic, founders will be able to turn to the loyal base of investors to ensure the stock price does not suffer from volatility during turbulent financial quarters. This is because stock classes that provide additional voting rights often cannot be traded. This, in the long run, benefits the company far more than it hinders its growth.
Conversely, dual-class share structures may be problematic, especially concerning investor relationships. A shared structure that prevents investors from partaking in executive decision-making may be perceived as unfair, as the board members of a company make decisions using investor capital. Moreover, academic research has shown that companies with dual-class share structures often show poorer corporate performance. Hence, it may be preferable for the UK to retain its restrictions on dual-class share structures.
Conclusion
In conclusion, the British listing regime, though strict, maybe the preferred system. It is a system that places the quality of public offerings above quantity, and that is the way it ought to remain. This is especially true in light of the recent wave of index fund trackers, or exchange-traded funds, which passively track major indices such as the FTSE 100 and S&P 500.
With a significant proportion of retail investors holding positions in these exchange-traded funds, it is vital to ensure the “premium” listed companies are held to the highest standard of regulatory scrutiny, therefore, restricting ease of access to the premium segments of indices through strict listing requirements does more good than harm.
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