The Hill Review and the Long and Winding Road to Premium-Listed Dual Class Share Companies

Dual class shares is an evergreen subject for discussion among corporate governance scholars, policymakers and practitioners. Without going back too much, one can recall that, at a time when deviations from ‘one share, one vote’ were relatively common across Europe, the European Union considered whether one-share-one-vote should become the EU norm. A study by ECGI, ISS and Shearman & Sterling on behalf of the European Commission highlighted the pros and cons of mandating one-share-one-vote and made clear how one-share-one-vote was nowhere imposed as a matter of law in the EU. The Commission then decided to retreat from the idea of mandating one-share-one-vote.

In the 2010s, the policy pendulum shifted in the direction of permitting deviations from one-share-one-vote: the phenomenon has been global with the important exception of the UK, as explored below. 

Regulatory competition dynamics explains the global shift in favour of dual class shares. Firstly, the increasing popularity of the mechanism among tech entrepreneurs, first in the US since Google’s IPO in 2004 and then in China (especially with Alibaba’s choice of listing in the US to preserve founders’ control via a special ownership arrangement deviating from one-share-one-vote, as described eg by Fried and Kamar here), gave a competitive advantage to exchanges of countries with no or fewer limits to listings of dual class companies. Secondly, a ruling by the Dutch Supreme Court in 2007 made clear that loyalty dividend clauses were valid, which was then interpreted as also legitimising loyalty (or tenured voting) shares, ie, charter articles granting higher voting rights to long-time shareholders. In the early 2010s, lawyers involved in the merger between Fiat and Chrysler Automobile advised the group to pick the Netherlands as the incorporation venue to adopt loyalty shares. Other (mainly Italian) companies later migrated there for the same purposes. 

That led Italy to change its law to allow for loyalty shares, whereas in parallel France chose to make loyalty shares, which were already available on an opt-in basis, the default rule for listed companies. Loyalty shares have therefore become relatively common in Italy and France, with the effect of entrenching controllers and especially the French state as the controlling shareholder at a number of companies (see Becht, Kamisarenka and Pajuste here, for France and Bajo et al here, for Italy). Belgium followed suit in 2019.

In the second part of the decade, Asia, Singapore, Hong Kong and China also allowed for the listing of dual class share companies, albeit with various limits that are not present in the US, including non-time based sunsets (as summarised by Yan here).

International competition for listings has recently increased the pressure on the UK to abandon its traditional aversion to dual class shares. This ban had been a matter of market practice for much of its history. In fact, UK company law is as permissive as few others in this area. Yet, as reported eg by Bobby Reddy in his article summarised here, under the pressure of institutional investors, the London Stock Exchange (LSE) long refused listing on the premium segment to companies not following the one-share-one-vote principle. It was only in 2014 that, bucking the global trend towards deregulation, the UK Listing Authority codified the rule, preventing dual class share companies from listing on the Premium segment of the LSE. 

As the recent Deliveroo case illustrates, no restriction to listing dual class companies on the LSE’s Standard (less regulated) segment exists. But Standard listing comes with a significant handicap because only Premium-listed companies can be considered for inclusion in the Footsie UK Index Series and therefore be purchased by passive mutual funds, thereby reducing demand for, and liquidity of, the stock. 

On March 3 this year, as part of the UK Treasury’s plan to strengthen UK’s position as a world-leading financial centre, the Hill Review was published. It contains a number of recommendations to improve the UK’s attractiveness as a venue for listings, including a recommendation ‘that, with sensible safeguards, rules should be changed to allow dual class share structures in the premium listing segment’. These ‘sensible safeguards’ are quite significant. Worth mentioning are:

• a maximum duration of five years, that is, the sunset clause that is heavily debated in the US (see eg Moore, here): at the end of the period (non-controlling) shareholders are entitled to decide whether to extend the structure; if they don’t, the company may retain the structure by moving to the Standard Market;
• the requirement that holder(s) of B class shares be a director of the company; 
• multiple voting being available only for the purposes of ensuring the holder is able to continue as a director and to block a change of control of the company; and
• limitations on the transfer of the multiple voting shares, that is, they will have to convert to one-vote shares at transfer, with minor exceptions.

Such safeguards may prove to be so strict as to prevent the Hill proposal from achieving the goal of attenuating the competitive disadvantage of the UK as a venue for IPOs, both compared to the US, where none of these restrictions apply, and to East Asian markets, where no time-based sunsets have been mandated. 

But a different aspect is perhaps more relevant than the merits of Hill Review’s proposals to gauge their promise. Consider that the exclusion of Standard-listed firms from the FTSE UK Index Series is a purely private choice of the index provider, FTSE Russell. Acknowledging that, the Hill Review also recommends that investors put pressure on index providers so that the link between Premium listing and index inclusion is broken. If that were the case, and Standard-listed companies with dual class shares could aspire to index inclusion, the proposed safeguards would likely become less relevant, because IPO firms may avoid them by listing on the Standard segment with no great harm to their shares’ demand at the IPO stage and liquidity thereafter. 

Yet, the outcome may be very different to what the Hill Review envisions. Given institutional investors’ inveterate aversion to dual class structures, they can hardly be expected to lobby in favour of including Standard-listed dual class companies’ shares in Indexes. In fact, in light of the opposition voiced by many of them against the Hill Review proposal, we can even expect institutions actually to lobby against the inclusion in FTSE indexes of Premium-Listed dual class companies’ shares. Truth to tell, FTSE Russell is owned by the London Stock Exchange, which clearly has an interest in becoming more competitive in the international market for IPOs: but FTSE Russell’s cherished governance principles may well be enough to prevent a high-profile change in index policies such as this from being a foregone conclusion.   

Once adopted by the UK Listing Authority, the Hill Review’s recommendations will thus not be the end of the policy debate on dual class shares in the UK. The debate will only become more similar to the US one (see Sharfman, here), where the policy focus in the past few years has similarly been, with some success for institutional investors, on whether dual class shares should be excluded from indexes.

To conclude, the Hill Review’s proposals on dual class shares are unlikely to achieve the goal of improving the City’s competitiveness in the international IPOs market. In part that may be due to the stringency of the proposed limits on dual class shares compared to the corresponding regimes in the US and Asia. But perhaps even more significantly, exclusion from indexes of dual class companies, with the ensuing drag on demand for their shares, may well survive the adoption of Hill Review’s proposals. 

Helpful comments from Kristin Van Zwieten are gratefully acknowledged.

Luca Enriques is Professor of Corporate Law at the University of Oxford.