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One-for-all and all-for-one. Until recently the London Stock Exchange shared the motto of the Musketeers. Specifically, one share-one vote was required for admission to the LSE’s “premium” listing segment and for eligibility to FTSE indices.
That started to change when exceptions for dual-class shares in premium listings were introduced in 2021. But the FCA’s latest overhaul of listings takes things even further as it tries to revitalise the London market. The evidence suggests that institutional investors may still prove an obstacle.
The FCA’s changes follow a wave of deregulation across Europe as exchanges compete for listings that are gravitating towards the US. London hopes a softer stance on dual-class shares will attract more technology and founder-led businesses. Historically, though, it has been London’s money managers, as much as its rulemakers, that have ensured use of dual-class listings remained low.
The US demonstrates the growing popularity of dual-class share structures. Last year about 12 per cent of Russell 1000 companies had them, up from about 9 per cent a decade earlier. In Sweden, the most successful European market at attracting new companies in the past decade, about half of companies have dual-class shares. A strong equity culture and a domestic bias among Swedish investment funds helps.
Liberalisation is also under way in other European countries. Even Germany, which had far stricter legal measures to prevent dual-class shares, is reintroducing them.
Evidence on how companies with dual-class shares perform is less clear cut. It is difficult to argue they have hindered the performance of Meta and Alphabet. Still, longer term studies suggest valuation discounts are the norm. An analysis by RBC found that Russell 1000 companies with dual-class shares have underperformed since 2011 and tend to exhibit greater volatility.
London’s limited crop of FTSE dual-class stocks — THG, Deliveroo, Wise, S4C and Oxford Nanopore — are all poor performers. Correlation is not causation. But London’s institutional investors have traditionally been “extremely resistant” to dual-class structures, notes lawyer Jorge Brito Pereira. That has long kept their use in check: a 2007 EU study noted that a wide variety of control-enhancing mechanisms were permissible in the UK but that market practice had rendered them a rarity.
It is not clear that City reformers promoting ever more liberal rules have a coalition behind them: the FCA noted a “very strong preference” from investors and investors groups for more restrictions on dual-class share structures. Rule changes might mean more entrepreneurs consider bringing their companies to London. They will only stay, though, if enough locals are eager to buy their shares.
andrew.whiffin@ft.com
