The UK’s Dual–Class Shares Reforms – Failing to Throw off the Shackles

Dual–class shares structure is where a company constitutes two or more classes of shares to which are attached different levels of voting rights. Since the rights to distributions or capital upon a winding up are equal, a class of shares with greater voting rights can give the holder of those shares the ability to maintain control of the company with a disproportionately low level of the equity.  Accordingly, dual–class shares allow a controller to cause the company to take certain actions without feeling a commensurate degree of pain if those actions cause a decrease in share price, incentivising decision-making driven by the personal predilections of the controller rather than shareholder value.  On the flipside, dual–class shares enable a controller to take a long–term perspective to the business of the company without being beholden to short–term fluctuations in share price.  The capacity to retain insulation from the public shareholders can be particularly pertinent to high–growth, ‘new economy’ companies that operate in industries where the long–term benefits of investment and strategies may not be easily observable to the public shareholders.  Until recently, the London Stock Exchange (‘LSE’) and its regulator, the Financial Conduct Authority (‘FCA’), have subscribed to the more pessimistic view of dual–class shares, with the structure formally prohibited from the premium tier (the LSE’s most prestigious listing board) for a number of years, and informally for even longer.  However, dual–class shares are back in the spotlight.

In December 2021, as presaged by Jonathan Hill’s review into listing regime reforms (the ‘Hill Review’), the Listing Rules were revised, relaxing the premium tier opposition to dual–class shares.  Given the types of conditions attached, though, it is no surprise that the FCA has referred to dual–class shares as ‘specified weighted voting rights’ shares – the conditions are so severe that they cannot be referred to as ‘dual–class shares’ in the traditional sense.  The proposals fall far short of the types of dual–class shares structures commonly adopted by the US tech–scene, including high–profile companies such as Alphabet, Facebook, Snap, Zoom and Airbnb.

The conditions to the use of weighted voting rights shares on the premium tier are (i) a five–year time–dependent sunset clause after which shares revert to one share, one vote, (ii) enhanced–voting shares may only be held by directors and revert to one share, one vote upon a transfer of those shares, (iii) the maximum permitted ratio of votes attached to enhanced–voting shares to votes attached to inferior-voting shares is 20:1; and (iv) enhanced–voting rights may only be exercised on resolutions relating to the incumbency of the enhanced–voting shareholder on the board, or on other resolutions following a change of control of the company.  A discussion of these conditions, and constraints on dual–class shares generally, can be found in my recent paper.  However, two of the conditions raise significant concerns in the context of the Hill Review’s aims to attract companies to list on the LSE.

Most critically, the proposals would not enable a founder to utilise weighted voting rights to maintain control over the composition of the board as a whole.  Without that control the public shareholders have the power to remove directors, and therefore indirectly influence boards.  In such circumstances, a founder seeking to implement innovative long–term initiatives that create short–term share price pressures could be supplanted from their role as a CEO.  As acknowledged by the Hill Review, founders are often concerned that a public listing will expose them to the whims of public shareholders, and without that protection, founders will continue to shun the listed markets.  It is instructive that the recent listings of Deliveroo and Wise, which occurred after the publication of the Hill Review, adopted more ‘genuine’ dual–class shares structures on the standard tier, ignoring this more restrictive requirements that had been proposed for the premium tier.

Time–dependent sunset clauses could also have a chilling effect on the aspiration to attract companies to the LSE at earlier stages in their life–cycles.  Some founders will be deterred in the knowledge that listing only grants them five years of insulation from public shareholders, and for a founder who may be inclined to adopt weighted voting rights on the premium tier, they may wait until later in the company’s life–cycle prior to listing to ensure that the company’s business will become sufficiently mature and discernible within the five–year window.  Although time–dependent sunset clauses have become more common in recent years in dual–class companies listing in other jurisdictions, such adoption is, apart from in India, voluntary and such sunsets vary widely in time–span underlining that one–size does not fit all.

The Listing Rules revisions do not represent ‘true’ dual–class shares, and instead merely constitute a five–year golden share–style takeover blocker with a guaranteed board seat right.  Although the proposals may resolve the concerns of some potential founders that admission to the premium tier could result in a takeover of the company soon after listing, many will continue to be deterred and seek out listings on overseas exchanges, such as New York, Hong Kong, and Singapore, that give them the flexibility desired, or simply remain private.  Perversely, those companies that do wish to adopt ‘true’ dual–class shares on the LSE will be restricted to the standard tier to which lesser corporate governance standards apply – the protections of the premium tier, such as related–party transaction regulations, are exactly the types of protections investors will value when investing in dual–class companies.  Even worse, the types of companies that do adopt weighted voting rights on the premium tier will not be redolent of the innovative, early–stage, high–growth, new economy firms (which are attracted by more expansive dual–class shares structures) sought by the authorities.  In my new book, ‘Founders Without Limits: Dual-Class Stock and the Premium Tier of the London Stock Exchange’ I propose a more attractive structure for founders, which also offers substantive protections for public shareholders.  However, the FCA proposals as designed will be unlikely to move the needle on UK tech–listings in the manner anticipated.

Bobby V. Reddy is an Assistant Professor with the Faculty of Law, University of Cambridge, Fellow, Churchill College, Cambridge, and Fellow, Cambridge Endowment for Research in Finance.