From Dual-Class Shares-Lite to Full Fat: The FCA’s About Turn on Dual-Class Shares

[This post was updated on 24 January 2025 to reflect the final Listing Rules reforms adopted by the FCA, and the author’s new paper on the topic.]

Back in the news again are dual-class shares – a capital structure where certain privileged shareholders hold shares with greater voting rights than other shareholders.  Dual-Class shares have had a storied history on the London Stock Exchange.  The exchange shifted from a generally permissive environment to an informal discouragement of dual-class share structures in the 1960s and 1970s, and then to a formal prohibition on the premium tier, the Main Market’s most prestigious segment, in the early 2010s.  However, in December 2021, in an attempt to attract high-growth, innovative companies to the exchange, the Financial Conduct Authority (FCA) revised the listing rules to permit companies with ‘specified weighted voting rights shares’ to list on the premium tier.

In a previous article, I noted that the FCA’s 2021 reforms amounted to nothing more than dual-class shares-lite.  Overly restrictive conditions were attached to specified weighted voting rights shares that negated many of the benefits that founders seek when adopting dual-class shares.  For a start, specified weighted voting rights shares structure could only endure for up to five years after the company had listed on the premium tier.  Even more pertinently, an insider possessing enhanced-voting rights could only exercise those rights on a resolution to remove that person from the board, unless there is a change of control of the company, in which case those rights could be exercised on all matters.  Essentially a glorified five-year takeover blocker.  In my book, Founders Without Limits, I predicted that the structure would not be attractive to founders of the high-growth, innovative companies the London Stock Exchange was seeking to attract, and, unsurprisingly, no firm adopted specified weighted voting rights shares under those 2021 reforms.

However, as discussed in my new paper, in July 2024 the FCA effected further Listing Rules reforms merging the standard and premium tiers of the Main Market; a radical reform which presented the FCA with an opportunity to revisit its approach to dual-class shares.  Less than three years after the introduction of specified weighted voting rights shares, it seemed that the regulators had tacitly acknowledged the structure’s deficiencies by disapplying many of its restrictive conditions.  For example, the five-year mandatory ‘sunset’ was abolished in its entirety (except for a ten-year sunset to be applied to corporate holders of enhanced-voting rights), and, critically, enhanced-voting rights are now potentially exercisable on most shareholder voting matters, not just upon a change of control.

Could the new-found acceptance of more expansive dual-class shares be the jolt in the arm that the UK’s founder ecosystem needs?  The absence of a mandatory time-dependent sunset will indeed be more attractive to founders.  Although the US experience suggests that market forces will lead to many dual-class shares firms voluntarily implementing time-dependent sunsets, such sunsets, if they are adopted at all, can be tailored to the characteristics of the company and the controller(s), rather than being a one-size-fits-all short sunset.  It potentially gives founders of high-growth, innovative, early-stage firms the opportunity to more effectively insulate themselves from the public markets during the period when their businesses’ future prospects are not easily observable to public shareholders.  Additionally, the greater scope to exercise enhanced-voting rights outside of a change of control allows founders to protect their executive roles leading their companies, which is likely, alongside blocking takeovers, the primary rationale for adopting dual-class shares.

The relaxation of the dual-class shares rules must, though, be assessed in the context of another concomitant FCA Listing Rules reform as part of its premium/standard tier merger – discarding the premium tier requirement that large related-party transactions between a company and its controlling shareholder be approved by the public shareholders.  A controlling shareholder does not have complete free-reign, since, assuming the relevant transaction is of a size greater than the applicable threshold, disinterested directors still need to approve related-party transactions and the company’s sponsor still has to confirm that the transaction is fair and reasonable to the company’s securties holders.  However, previous studies have noted that the genuine independence of directors can be questioned in the face of a controlling shareholder, and continuing provisions that give public shareholders some say in the appointment of independent directors are largely ineffective. 

A discussion of the merits of the related-party transaction regime generally is for another day.  In the dual-class shares realm, though, surely disenfranchising public shareholders when a company enters into a large transaction with its controlling shareholder invites exploitation.  Not long has passed since the controlling shareholder controversies of the 2010s, including at ENRC, Bumi, Sports Direct, Exillon and Ferrexpo.  The opportunities for abuse are higher with dual-class shares, since the 2024 reforms do not provide that enhanced-voting shareholders be required to retain at least some ‘skin-in-the-game’ through the ownership of a minimum level of equity cash-flow rights - a dual-class shares controlling shareholder could enter into self-serving related-party transactions largely detached from any ensuing impact on share value.

It is true that the US exchanges also do not mandate independent shareholder approval of related-party transactions, and US instances of documented abuse by controlling shareholders of dual-class shares firms are few and far between.  However, as the FCA acknowledged, controlling shareholders of Delaware corporations potentially owe fiduciary, duties and in some circumstances related-party transactions can be challenged under an entire fairness regime, unless the transaction has been approved by distinterested directors and shareholders.  Furthermore, the US’s litigation-friendly culture and opt-out class action procedures can act as ex ante deterrents to controlling shareholder abuse.

I advocated for a more relaxed approach to dual-class shares on the London Stock Exchange as far back as 2019.  Notwithstanding possible risks, it is a vital part of the package of reforms, both regulatory and more market-oriented, required to resuscitate the London Stock Exchange’s ailing equity market.  The initial attempt to introduce dual-class shares to the premium tier was far too restrictive; however, in a complete volte-face, the new reforms abandon an important ancillary form of public shareholder protection that would have buttressed the risks of more expansive dual-class shares.  It is understandable that the UK is attempting to mimic the US’s success with dual-class shares, but the legal environments in the UK and US are not identical.  Regulators should not expect that transposing regulatory requirements from jurisdiction to another will automatically result in similar outcomes.  Accordingly, there is greater justification for at least some measure of related-party transaction protection under listing rules in the UK than the US.  Dual-class shares-lite was clearly an unambitious misstep, but full fat dual-class shares accompanied by a regulatory bonfire of the related-party transaction regime may not be the change the London Stock Exchange needs.

Bobby Reddy is a Professor of Corporate Law and Governance at the University of Cambridge.