Permitting Dual Class Shares in the UK Premium Listing Regime—A Path to Enhance rather than Compromise Investor Protection

Since late 2019 the UK Government has been discussing the possibility of allowing dual class capital structures in the premium listing regime of the London Stock Exchange (LSE). The revival of IPOs with dual class share structures in the US and the increasing popularity of such share structures in Asia has put pressure on the policymakers in the UK. With the recent reform in the leading financial centres, such as Hong Kong, Singapore and Shanghai, many stock exchanges now see permitting dual class companies to list as a necessary step to ‘stay relevant in a time of relentless competition in the cross-border IPO business’ (Leung and Tung (2018), p. 41). One year later, Chancellor Rishi Sunak formally launched the UK Listings Review, led by Lord Hill, in November 2020. One of the aims was to propose to lift bans over premium listing with dual class shares. The final report of the UK Listings Review recommended, in March 2021, changing the Listing Rules to allow dual class share structures for premium listings. This move was welcomed by the LSE, FCA and Government. It is therefore reasonable to foresee that the FCA will permit dual class listings in the premium listing regime in the near future.

There is, however, a long tradition of institutional investors’ distaste for dual class share structures. In fact, the near extinction of dual class listings in the UK capital markets can be largely attributed to the opposition of large British institutional investors. While permitting dual class listing can help firms with strong desire for long-term control to overcome the reluctance to accept external equity capital, it would reduce (institutional) investors’ influence on both the controlling party and the incumbent management. Similar to the classic dilemma for founders, investors also face a dilemma between sharing the success of fast-growing dual class companies and relinquishing their participatory rights. The potentially distorted ownership incentives exacerbated by dual class shares can been seen as another main reason for institutional investors’ resistance to such share structures in premium listings. Accordingly, despite it being argued that enhanced voting rights provided to founders of companies such as Google, Facebook and LinkedIn have contributed to their success by insulating founders from short-term market pressures, many institutional investors and shareholder representative groups have opposed dual class shares, arguing that they would weaken the UK’s high standards of corporate governance and disadvantage minority shareholders.

My recent paper critically discusses the conflict between the demands to attract listings from high-tech and innovative companies and concerns of a race to the bottom in the UK context. It rebuts criticisms based on investor protection and argues that if dual class companies were permitted to list in the Premium Segment, the higher level of regulatory protection provided in the premium listing regime would help enhance, rather than compromise, minority shareholder protection and shareholder engagement.

To start, situations where the founder/insider with dual class shares may use their power to extract private benefits of control can indeed occur in any company with controlling shareholders. It should also be noted that companies in the UK are free to adopt dual class share structures, and eligible to apply for listing on the LSE Main Market’s Standard Segment or Alternative Investment Market with such share structures. The right question to ask, therefore, becomes: will banning premium listings with dual class share structures help to improve minority shareholder protection?

The Listing Rules relating to independent business requirements, relationship agreements with controlling shareholders, additional scrutiny and shareholder approval for significant transactions, related party transactions and cancellation of listing, among others, only apply to a company that has premium listing. So they cannot protect minority shareholders in standard-listed companies. And the UK Corporate Governance Code will not apply to these companies either. This means that companies admitted to the Standard Segment are subject to significantly lower obligations when compared with their counterparts in the Premium Segment. By the same token, permitting dual class companies to be admitted to the Premium Segment, with its higher level of regulatory requirements, could enhance, rather than diminish, shareholders’ engagement in dual class companies.

Take THG’s IPO as an example. Its dual class share structure makes it ineligible to be listed in the Premium Segment. After the IPO, the founder is both the chairman and chief executive officer of THG, he is also the indirect owner of the Propco Group, holding real estate used or occupied by THG under leases. But because THG is not a premium-listed company, the principle relating to the division between the roles of chairman and chief executive in the UK Corporate Governance Code is not applicable, and THG is not required to explain any non-compliance in its annual report under the comply or explain approach. Similarly, related party transactions (eg between THG and the Propco Group) will also be subject to less onerous scrutiny, as the relevant provisions in the Listing Rules are not applicable to companies with a standard listing. If THG were allowed to be admitted to the Premium Segment, then a higher level of regulatory protection could be provided to investors.

Banning premium listing with dual class share structures per se will not help minority shareholder protection. Precluding companies with dual class shares from admittance to the premium listing regime, but allowing them into the standard listing regime with lower level of regulatory protection for minority shareholders, cannot be justified on the grounds of investor protection. Minority shareholder protection would be much better addressed by positioning shareholders with inferior voting power to effectively use the power available to them under the Listing Rules, rather than by precluding companies with dual class shares from listing in the Premium Segment. If mechanisms can be adopted to hold controlling shareholders accountable in companies with premium listings, the same mechanisms should also be able to help mitigate the risk of abuse by founders with multiple voting shares.

Consequently, contrary to the conventional view that permitting premium listings with dual class shares would compromise investor protection, my paper concludes that the permission would actually enhance minority shareholder protection and shareholder engagement in the existing UK listing regime. If investor protection is the genuine concern of those who campaign against dual class shares, then allowing dual class listing in the Premium Segment would provide those inferior voting shareholders with better protection than they have now in the standard listing regime.

Min Yan is an Associate Professor in Business Law at Queen Mary University of London.