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Should the UK allow dual-class share structures to attract more tech firms to IPO in London?
The Chancellor seems to think so, and I do too.
(Thread) https://www.tenentrepreneurs.org/blog/how-to-make-london-the-destination-for-tech-ipos
The Chancellor seems to think so, and I do too.
(Thread) https://www.tenentrepreneurs.org/blog/how-to-make-london-the-destination-for-tech-ipos
When tech companies go public, their founders are typically reluctant to give up control.
They’re afraid their long-term vision will be bogged down by short-termist stock markets preoccupied with quarterly returns. https://www.tenentrepreneurs.org/blog/how-to-make-london-the-destination-for-tech-ipos
They’re afraid their long-term vision will be bogged down by short-termist stock markets preoccupied with quarterly returns. https://www.tenentrepreneurs.org/blog/how-to-make-london-the-destination-for-tech-ipos
To get around this, they do two things.
Some employ a dual class share structure. At Facebook: Class A shares are worth 1 vote per share, by contrast the Class B shares controlled by Mark Zuckerberg and other Facebook insiders are worth 10 votes. https://www.tenentrepreneurs.org/blog/how-to-make-london-the-destination-for-tech-ipos
Some employ a dual class share structure. At Facebook: Class A shares are worth 1 vote per share, by contrast the Class B shares controlled by Mark Zuckerberg and other Facebook insiders are worth 10 votes. https://www.tenentrepreneurs.org/blog/how-to-make-london-the-destination-for-tech-ipos
Another way founder-led tech businesses can retain control is by only floating a small percentage of their shares when they IPO. For instance, when LinkedIn floated in 2011 they only released 9.4% of their shares. https://www.tenentrepreneurs.org/blog/how-to-make-london-the-destination-for-tech-ipos
Both of the above arrangements would bar a business from a Premium Listing on the London Stock Exchange’s Main Markets, which means the company could not join any FTSE indices. https://www.tenentrepreneurs.org/blog/how-to-make-london-the-destination-for-tech-ipos
While I think fears about market short-termism are somewhat overblown.
There's clearly a demand from founders and new innovations such as the Long-Term Stock Exchange are filling that gap. https://www.tenentrepreneurs.org/blog/how-to-make-london-the-destination-for-tech-ipos
There's clearly a demand from founders and new innovations such as the Long-Term Stock Exchange are filling that gap. https://www.tenentrepreneurs.org/blog/how-to-make-london-the-destination-for-tech-ipos
On dual-class shares, the UK is an outlier. The US has allowed the arrangements for a while and recently Singapore and Hong Kong have liberalised rules allowing founders to have greater control. https://www.tenentrepreneurs.org/blog/how-to-make-london-the-destination-for-tech-ipos
A range of studies suggest that relaxing the UK’s rules on premium listings carry little risk to investors.
First, look at staggered boards, which reduce the ability of shareholders to kick them out when quarterly results disappoint and allow managers to focus on the long-term.
First, look at staggered boards, which reduce the ability of shareholders to kick them out when quarterly results disappoint and allow managers to focus on the long-term.
One study, which looked at 34 years of data of board staggering and destaggerings, found that staggered boards are “associated with a statistically and economically significant increase in firm value”. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2674679
This study isn't an outlier by the way.
More independent boards seem to make business more valuable. https://twitter.com/bswud/status/778619696593661952
More independent boards seem to make business more valuable. https://twitter.com/bswud/status/778619696593661952
What about small floats? Again, a study to be published in the Journal of Banking and Finance finds that companies that float less than 20% of their shares outperform the market over the long term.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2359323
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2359323
For context, to get a premium listing in the UK you need float at least 25% of your shares. https://www.pwc.com/mn/en/capital-markets/assets/mn_successful_listing_in_london_eng.pdf
The status quo is in some ways, the worst of both worlds. The researchers find that while small floats do best, big floats also perform well. It’s the inbetweeners selling between 20% and 40% that perform worst.
This is not to advocate a free-for-all, however. We may be better off charting a middle course as Hong Kong and Singapore have. https://www.tenentrepreneurs.org/blog/how-to-make-london-the-destination-for-tech-ipos
SEC commissioner Robert Jackson Jr analysed 157 dual-class IPOs form the past 15 years and found that businesses that had sunset provisions on their dual-class shares performed better over the medium to long term.
https://www.sec.gov/news/speech/perpetual-dual-class-stock-case-against-corporate-royalty#_ftn6
https://www.sec.gov/news/speech/perpetual-dual-class-stock-case-against-corporate-royalty#_ftn6
As he puts it, some "companies are asking shareholders to trust management’s business judgment—not just for five years, or 10 years, or even 50 years. Forever.”
Sunset clauses for premium listings seem to make sense and are likely to be demanded by index providers anyway.
Sunset clauses for premium listings seem to make sense and are likely to be demanded by index providers anyway.
When Rishi Sunak's new taskforce repots back, I hope they follow the research and propose modernising outdated rules on dual-class shares and minimum float requirements. https://www.gov.uk/government/news/chancellor-sets-out-ambition-for-future-of-uk-financial-services
You can read more here. https://www.tenentrepreneurs.org/blog/how-to-make-london-the-destination-for-tech-ipos
