The debate on dual-class structures is hotting up. Hong Kong and Singapore seem to be taking long-mooted steps to allow companies who adopt dual-class structures to IPO on their exchanges.
The premise of a dual class structure is simple: on IPO, founders are able to keep control of the listed company through holding voting shares, and investors only get access to the economics though non-voting shares. The structure is particularly relevant for high-growth tech companies, who argue that the usual one-share one-vote model is not appropriate for companies on their trajectory.
In the UK, a company with a dual-class structure is only permitted to IPO within the Standard Listing regime. This is less attractive to investors than the Premium Listing regime. When a Standard Listing is all that is on offer it seems that potential IPO candidates simply head elsewhere.
Yet there is little traction in the UK for dual-class structures. The Patient Capital Review noted that permitting dual-class structures within a Premium Listing regime could help make tech IPOs more attractive in the UK, and nudged the FCA to consider. But the October 2017 FCA feedback statement didn’t engage on the point. The concerns of corporate governance and institutional shareholder bodies have been the loudest voices so far.
But aren’t we missing a trick? As I have previously noted, there is evidence of a long-term decline in the number of IPOs in the UK and the stage at which companies are coming to market. But the current approach arguably narrows the universe of investment opportunities and excludes ordinary shareholders from companies that could have years of potentially explosive growth. BlackRock has made interesting suggestions as to how the balance between shareholder rights and founder control can be achieved from a practical perspective – e.g. by way of ensuring one vote per share on critical issues, and giving all shareholders the chance to reaffirm the dual-control structure every 5-10 years.
The UK has 18 tech “unicorns” (i.e. start-up tech companies with a valuation over $1bn). Yet there are only two (!!) technology companies that are constituent members of the FTSE100. How will this number increase when founders of these unicorns could list them in New York, Singapore or Hong Kong instead - and maintain voting control?
As the UK digital tech scene continues to play a larger and larger role in the UK economy, now would seem a good time to properly consult on permitting certain dual-class structures within the Premium Listing segment and FTSE100 index. The UKLA is contemplating an entirely new listing segment so as to try and attract sovereign controlled companies to London – surely it is appropriate to expend similar efforts to ensure that UK high-growth tech companies also have a suitable path to the UK capital markets.