Listing reforms in the UK: to market, to market?

The Financial Conduct Authority is proposing wide ranging reforms to the UK's Listings Rules to entice more high growth companies to list in London

In February of this year, SoftBank decided to list Arm, the Cambridge-based semi-conductor design company, in New York instead of in London, much to the chagrin of UK officials who had lobbied for a return of Arm to the London Stock Exchange (LSE). Prior to SoftBank's acquisition of the business in 2016, Arm had been listed on the LSE and was one of the FTSE 100's biggest tech stocks.

This news came against the backdrop of a perceived wider exodus of home-grown UK groups over the past few years, including the recent announcement that CRH, the world's largest supplier of building materials, would also be exiting from the FTSE 100 to list in New York.

The key question then for UK regulatory officials is what can be done to reverse the recent direction of travel for London listings?

What do the numbers say?

According to the UK Listing Review published in 2020, the number of listed companies in the UK has fallen by about 40% from a recent peak in 2008 and between 2015 and 2020 the UK accounted for only 5% (by number) of initial public offerings (IPOs) globally.

Indeed, as of March 2023, a total of 1,929 companies were listed on the LSE. This figure represents a substantial decrease from even 8 years ago in 2015, when there were over 2,400 companies listed on the LSE, as the number of UK IPOs has not kept pace with the number of 'take private' acquisitions and other delistings during this period.

Furthermore, the LSE is widely seen as comprising of a higher proportion of "old economy" businesses operating in industries such as mining, oil & gas or traditional financial services, especially in comparison with the New York Stock Exchange and NASDAQ, both popular listing venues for new and fast growing tech companies.

Diagnosing London's dilemma

What then are the reasons behind the UK's stuttering equity markets? Also, what can be done, and what is currently being done, to attract more companies, specifically high growth tech companies, to list in the UK?

One reason often put forward is that there is less appetite amongst UK institutional investors to invest in the domestic stock market. As recently as the 1990s, UK pension funds had allocated around 50% of their assets to UK equities, whereas that figure is now closer to 2% of their assets. This dramatic shift is often attributed, at least in part, to regulations requiring companies to hold pension deficits on their balance sheets, which in turn is said to have triggered a shift in the investing appetite amongst UK pension funds away from the stock market and towards less risky assets, such as government bonds. It could also be argued that the diversification away from UK equities is an result of London listed companies being seen to underperform their peers listed overseas. For example, UK equities returned 6% a year for the past decade vs a return on US equities of 12%.

However, the regulatory environment for UK listings has also attracted scrutiny from commentators. In particular, the recently reformed UK rules on free float and dual class share structures had been seen as deterring would be UK listings, in particular companies that wanted to float a relatively small portion of their overall share capital. Likewise, old UK rules on dual class share structures were viewed as impediments to listings by founder led tech businesses as the old UK rules prohibited dual class structures from listing on the LSE's premium listing segment.

Other governance rules that have also frequently been labelled as dissuading high growth companies from listing in London include regulations in respect of related party transactions which require shareholder approval for deals between a company and, for examples, its major shareholders, as well as requiring shareholder approval of certain other significant transactions.

What is being done to change course?

On 3 November 2020, the UK Chancellor launched a UK Listings Review, chaired by Lord Hill to propose reforms to counteract the decline in London listings. The review's recommendations included the delivery of an annual report to Parliament setting out the steps taken in that year to enhance London's position as an international destination for IPOs, as well as redesigning the UK's post-Brexit prospectus regime and empowering investors by tailoring information to better meet their needs.

On 2 December 2021, the FCA published changes to the Listing Rules taking into account the recommendations of the UK Listings Review, including reducing the free float requirement to 10% and also allow a targeted form of dual class share structures for premium listed issuers.

Building on the UK Listings Review, on 3 May 2023, the FCA released a consultation paper in which it laid out its 'blue print' for a new single listing category for equity shares in commercial companies (ESCC). The main reforms proposed are as follows:

• The introduction of a single ESCC category to replace the current premium and standard share listing categories as well as a new listing category for special purpose acquisition companies (SPACs).
• The removal of compulsory shareholder votes for significant transactions and related party transactions.
• Easing rules requiring companies to have a three-year financial and revenue earning track record as well as a clean working capital statement as a condition for listing. Instead, a disclosure-based approach would be adopted that puts the onus on shareholders to satisfy themselves that certain risks have been adequately disclosed to investors.
• Reforming the rules relating to dual class share structure.

The consultation closed on 28 June 2023 and the proposed reforms could, according to the FCA, be implemented as early as 2024.

The reforms ostensibly seek to make Listings Rules more flexible and less burdensome from an administrative perspective. However, some UK investors have suggested that such a radical overhaul of the existing rules shifts supervisory responsibility from regulators to shareholders and investors, although the FCA insists that its emphasis on disclosure and transparency will ultimately help safeguard market integrity and increase investor protections. There is also a concern among market participants that additional reforms are required to address the other underlying of the UK's equity market malaise, such as a perceived lack of investment appetite amongst UK pension funds and other institutional investors in UK listed companies.

Looking forward

The extent to which any of these changes already actioned or those proposed by the FCA have had or will have an impact the number and type of UK listings remains to be seen. While in theory the changes proposed in the latest FCA consultation should make London a more attractive place for companies looking to list, the challenges currently facing the UK equity markets are unlikely to be solved by these changes alone and the debate regarding exactly how to revitalise and resuscitate the UK's equity markets should continue to remain a priority for UK regulators and policy makers.