Hill review urges UK listing rule reforms

5 March 2021: A proposed relaxation of the company listing rules aimed squarely at increasing London’s attractiveness as a financial centre post-Brexit has been published.

The Treasury-backed Review carried out by Lord Jonathan Hill - a former special adviser to Prime Minister John Major and subsequent EU financial services commissioner - has recommended a wide range of reforms designed to encourage investment in UK businesses and support the development of innovative growth sectors such as fintech and green finance.

Hill said the UK should use its post-Brexit ability to set its own rules “to move faster, more flexibly and in a more targeted way”. In January, Amsterdam overtook London as the biggest share trading centre in Europe, while the number of listed companies in the UK has fallen by about 40% since its most recent peak in 2008, as London faces stiff competition as a financial centre not just from the US and Asia, but from elsewhere in Europe.

The report includes a host of recommendations but the three areas that have received the most attention from the market focus on dual class shares, the free float rules and Special Purpose Acquisition Companies (SPACs).

Dual class shares There have been several high-profile listings on Wall Street of companies with dual class shares, typically in high tech and disruptive sectors. A feature of these has been strong, enigmatic leaders seeking to control the business. Hill wants to attract those businesses to list in London.

“Companies with dual classes of share were not eligible for Premium listing in London, which kept them out of the main FTSE indices and meant that a lot of institutions wouldn’t buy this stock. The recommendations by Lord Hill should change that and make these shares more appealing to funds,” David Petrie, ICAEW’s Head of Corporate Finance, said.

With an eye on corporate governance standards, Hill proposes certain conditions, including a maximum duration of five years, a maximum weighted voting ratio of 20:1 and requiring holders of B class shares to be a director of the company.

Free float rule The review suggests lowering the absolute requirement for free float to 15% — meaning founders need to sell fewer shares to list — and allowing more choice for companies of different sizes to use measures of liquidity other than an absolute free float percentage.

“The 25% free float rule is somewhat out of date. Provided a company is big enough, a lower percentage free float should be fine, as long as it is large enough to ensure liquidity. If so, the share price will be a fair reflection of company value,” Petrie said. SPACs A SPAC is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. In 2020, 138 SPACs raised over $53 bn globally,almost entirely by SPACs listed in the US.

The review proposes revising the UK listing rules, which can require trading to be suspended in the shares of SPACs on announcement of a potential acquisition. Hill suggests reviewing that requirement and introducing UK-style protections for shareholders at the time of an acquisition such as a shareholder vote and redemption rights.

In the UK too, interest in SPACs has been growing steadily, although the market has been dominated by a small number of relatively large listings. Over the last five years, more than 50 SPACs have listed in the UK and over $2bn (£1.34bn) has been raised by SPACs on the LSE since 2017, according to figures from the London Stock Exchange.

“Good companies ought to be able to list at full value without doing so via a SPAC. Investors in SPACs are asked to believe companies’ value can be transformed into something much higher, but this is a big ask, particularly because SPACs will often be competing with other listed companies or private equity for acquisition targets,” Petrie said.

Next steps The government said it would examine the recommendations, many of which require consultations by regulator the Financial Conduct Authority (FCA), to which the Corporate Finance Faculty will be preparing a response on behalf of ICAEW. The FCA said it aimed to publish a consultation paper by the summer, with new rules expected by late 2021.

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