Should London tear up the listing rules to give tech companies free rein?

The timing of the UK government’s announcement of the terms of its review aimed at making the City a safe space for tech companies (officially it’s Lord Hill’s review on stock market listings) could hardly have been better timed.

It came just a day after Arrival, a British electric bus and van developer, had shunned London in favour of the Nasdaq.

Instead of a traditional float, it agreed to be bought by a “special purpose vehicle” – a shell company set up by investors with a view to finding and buying an operating subsidiary – thus escaping the rigamarole of publishing a prospectus, embarking on investor roadshows etc.

With a valuation north of £4bn, it would have been knocking on the door of the FTSE 100, where Ocado sits in techtastic isolation, had the transaction been accomplished in London (the company maintains that it should still be viewed as a British success story).

The work of Lord Hill, a former EU financial services commissioner, is aimed at convincing companies like Arrival of the City’s virtues, either by tempting some of the privately held unicorns that make their homes here to go public or by drawing interest from overseas outfits.

He’s been asked to look at “whether current rules around free floats, dual class share structures, and track record requirements strike the correct balance between corporate governance and market integrity on the one hand, and the requirements of companies seeking to list on the other”.

In other words, does Britain follow the US in allowing company founders to hold shares with more clout than other investors, as is the case with the founders of Google and Facebook, for example. They are able to exert majority control with minority stakes.

Companies may also be allowed to achieve premium, FTSE qualifying listings with less than 25 per cent of their shares in free float. Financial track record and prospectus requirements may also be eased.

The issue of voting is highly controversial. Corporate governance wonks have fought long and hard to ensure shareholders vote on the basis of one share one vote. They have looked on aghast at what’s been happening with tech companies overseas, especially in the US.

In December 2018, the Harvard business review pointed out that a fifth of the companies on the New York Stock Exchange had this structure. Many of them were new tech floats, but their number also included older family-controlled firms such as the New York Times and Ford.

Kurt Schacht, managing director for policy and regulatory relations at the CFA Institute, took to the FT to describe the practice of dual class shares as a “poison pill” last year, at the time when Lyft and Uber were floating.

Lyft’s troubled float featured a dual class, allowing its founders 20 votes for every share they held. It generated a great deal of criticism from investors. Uber, by contrast, went the other way. Having ousted its controversial founder Travis Kalanick and cleaned house, it was able to portray itself as the grown up.

Moving away from one share one vote feels horrible, and is horrible if over mighty founders flip their investors off as sometimes happens even without it.

But proponents argue that it could lead to the creation of companies less obsessed with quarterly earnings, more willing to invest and look long, if their founders are so minded.

They may also be more willing to resist opportunistic takeover approaches fuelled by temporarily low share prices or a cheap currency as sterling currently is thanks to Brexit. UK institutions have had a nasty habit of folding in the face of bad bids, especially when they’re recommended by boards keen to cash in.

The Investment Association, which represents UK institutions, says it welcomes a review to “re-energise public markets” while calling for “sufficiently robust standards to allow investment managers to meet the stewardship expectations of their clients and the regulator”.

That leaves it sitting on the fence, although we will likely see something more substantial when it has consulted its members.

Some of them are quite active when it comes to using their voting power; willing to prod companies into doing better on the climate crisis while opposing some of the absurd remuneration packages that continue to blight corporate Britain.

But others are much less so. The industry’s dirty secret is that there is still a long tail of asset managers perfectly willing to turn a blind eye to the most appalling corporate behaviour.

One shareholder one vote is less important than it looks because these investors don’t use the votes they have. It is still very rare for a bad board to be subject to a defeat. Shareholders have long had the power to kick bad directors out of  boardroom. They almost never use it.

To a certain extent, the market will correct itself if badly run companies try to sell second class shares to investors. They may fail to get their floats away. Even if they succeed they will find poorly governed companies typically trade at a discount to rivals with better oversight.

Lyft offers a real life example. Its float did not go well and the shares are still under water. Uber has fared better.

Not all of the ideas Lord Hill will consider are so controversial and more liberal listing rules are surely on the way.

Still, if that does include allowing tech company founders with minority stakes to exert majority control through dual class shares, there will surely have to be safeguards because the risk of scandal is real and the market won’t solve the problem on its own.