Why is the FCA changing its rules on dual class share structures?

The FCA first allowed dual class share structures (DCSS) on the premium segment at the end of 2021, following recommendations made by the UK Listing Review.  Now, less than two years later, it has proposed removing most of the restrictions it originally imposed.  Why is the FCA revisiting its rules so soon, what would the changes mean for the London market – and what details remain to come?

What’s behind the new proposals?

The new proposals come as part of the FCA’s wider Primary Markets Effectiveness review, and the new permissive approach to DCSS would apply on the proposed new single listing category for equity shares in commercial companies (ESCC).

The proposals are driven by three main factors. 

• A new segment: The new single segment will replace both the existing premium and standard segments.  At present, premium listed issuers can have only a limited form of DCSS (5 year sunset, enhanced voting on removal of holder as a director at any time but enhanced voting on all other matters only after a change of control), while the current standard segment places no restrictions on DCSS at all.  So a new one-size-fits-all balance had to be struck.  Feedback to the FCA’s original suggestion - that the single segment should replicate the premium restrictions - was not positive, and the revised proposals are designed to offer more flexibility.
• Experience of market dynamics: Another factor that has encouraged the FCA to liberalise its rulebook is the way the market has responded to current freedoms on the standard segment.  Market participants have negotiated bespoke DCSS arrangements to best fit individual issuers and their potential investors (see table of DCSS key features for certain standard segment examples below).  As a result, the FCA is now more willing to let market dynamics set the pace on the single segment, with only light touch rules to set an ‘outer boundary’ on permitted forms of DCSS (see table comparing key features of the standard, premium and proposed rules below).

The final consideration is, of course, the competitive position of London in the international capital markets.

Where does this leave London?

The FCA’s proposals are, of course, part of wider initiatives to improve the appeal of London as a listing destination, and a key sector that London needs to appeal to is tech. A ‘valuation gap’ has developed between UK and US listed markets.  While many factors contribute to that gap, one element is the UK’s low proportion of listed tech companies and, as the FCA notes, in 2021 around 45% of US IPOs in the commonly founder-led technology sector included DCSS.

While it helps that the proposals would place London towards the more liberal end of the spectrum internationally, issuers presently considering the standard segment may feel the FCA could have gone further to enhance competitiveness with the US exchanges: both NYSE and Nasdaq permit DCSS without restrictions (as the London standard segment does currently).  In Hong Kong, by contrast, weighted voting rights are restricted to innovative and high growth applicants, while  Singapore also imposes some conditions (requiring an applicant to establish its suitability for listing with a DCSS structure and comply with prescribed safeguards).  In the EU, the approach varies by venue, with Amsterdam providing the greatest flexibility, while Paris prohibits all DCSS (other than double-voting for holders of two-years standing).

What don’t we know yet?

The FCA’s recent paper sets out the broad sweep of its proposed reforms, but we do not yet have all the detail. 

• Existing issuers outside the boundary: A key question will be next steps for existing London standard listed issuers with DCSS that fall outside the proposed single category boundary.  The FCA has said its expectation is that existing commercial companies with shares on the standard segment should transfer to the new single listing category, but it is still considering what options should be open to those not able – or not willing – to do so.  One possibility is that these issuers will instead be permitted to transfer to a proposed new ‘other shares’ category, potentially on a time limited basis, although whether that will be a desirable route remains to be seen. 
• Index inclusion: What will the proposals will mean for index inclusion?  Broadly, at present, those on the premium segment are eligible for the UK FTSE index series and those on the standard segment are not.  The FCA’s approach seems to be to set a baseline, not to act as a proxy for the indexes, and its stated expectation is that index providers will craft inclusion criteria to meet the different objectives of their users with less dependence on regulatory standards. 

How will FTSE Russell treat enhanced DCSS under its ‘minimum voting rights hurdle’?  At present, to be eligible for UK index series inclusion, an issuer must generally have at least 5% of voting rights held by holders included in the free float.  As the proposals contemplate a wider range of DCSS on the single segment, however, FTSE Russell may choose to make adjustments to when and how weighted voting rights are taken into account.  Index inclusion for issuers with DCSS is possible in the US, where S&P recently decided to readmit companies with multiple share class structures to the S&P 500 and other indices.  This decision has not gone entirely without criticism, so it will be interesting to see how FTSE Russell decide to proceed.

If the proposals are taken forward as expected, markets should not have long to wait to see how the rules are received by exchanges, IPO candidates and index providers - the FCA is aiming is for an accelerated timetable in 2023 for its reforms.

Standard / premium / proposed single listing category DCSS – key features

Examples of standard segment issuers with DCSS – key features