Debate over dual-class shares is unlikely to end with their introduction, says a leading academic, with the argument shifting to demand that companies who introduce such shares should be blocked from inclusion in mainstream indexes.
Luca Enriques, a professor of corporate law at Oxford University, writes that those opposed to dual-class shares for London’s premium listed companies are likely to set out a case that the stocks should not be included in FTSE indexes, the bedrock guide for many funds controlling vast sums in investment capital.
He adds that the wrangling over proposals made in the Hill Review for premium listed companies could last long into the future, helping make London an unattractive market.
Once embraced by the UK Listings Authority, he writes, the Hill Review recommendations will “not be the end of the policy debate”. Instead it will come to resemble a long-running US argument which has seen institutional investors focus “on whether dual-class shares should be excluded from indexes”.
Dual-class shares and FTSE indexes
Lord Hill’s paper was published in March setting out a series of recommendations including the introduction of dual-class shares for companies that qualify as “premium”. Indexes focus on London’s premium companies for inclusion.
The City of London’s “standard” listed companies can already use dual-class shares. But they have not impressed everyone. Deliveroo recently listed in the UK as a standard company with dual-class shares, causing many institutions to ignore the stock but also make plain their concern about the company’s capital structure to national media outlets.
The government’s drive to make dual-class shares a staple of City listings comes as an effort to attract the flotations of tech giants, where founder CEOs prefer beefed up voting rights to retain control of their companies.
Observers see the Hill Review recommendations as an attempt to inject dual-class companies into the big indexes. One group likely to continue opposing their inclusion is the International Corporate Governance Network (ICGN). George Dallas, policy director at ICGN, believes the Deliveroo listing demonstrated the dislike of dual-class shares among investors, including passive funds that rely heavily on them.
“The recent debacle on the Deliveroo IPO shows that many in the UK investment community are opposed to these types of issues, if they have the choice,” he says. “But institutional and retail investors with passive index-based strategies and investment mandates would have investment exposure to dual-class companies that are listed in the index, even if they do not want this exposure.”
Dallas worries that the listings authorities are too focused on the needs of companies and should not leaving key decisions to index providers. “The main gatekeepers should really be the UK regulatory authorities who seem to pay more attention to the needs of issuers and the London underwriting community more than the global investor base.”
Safeguards ‘may undermine competitiveness’
The Hill Review did attempt to assuage investors concerns by including in proposals a series of measures intended as governance counterweights to moderate the influence of all-powerful founder CEOs.
A sunset clause would mean dual-class shares last only five years. There is also a transfer sunset proposal: shares cannot change ownership and retain their extra voting rights. The review proposed a maximum voting ratio of 20:1 and holders of dual-class shares must be a director of the company. Lastly, extra voting rights would only apply to making sure owners are able to continue as a director or blocking a takeover.
Enriques says these safeguards may actually undermine the competitiveness of London as a dual-class share advocate given they represent more stringent restrictions than elsewhere. An ongoing row over index inclusion would also work against London’s attractiveness, he says.
Others have also argued the restrictions are problematic. Swedish academics Erik Lidman and Rolf Skog say dual-class shares work but Lord Hill’s counter measures might actually undermine the reasons why the shares are attractive in the first place.
The decision to introduce dual-class shares has yet to be made. Observations by Enriques suggest that even if they are, the argument over their regulation and use is set to run and run.