The Introduction of Multiple Class Share Structures to the UK Market

On 11 July 2024, the Financial Conduct Authority (FCA) published its policy statement (PS24/6) outlining the final version of the new UK Listing Rules, which came into force from 29 July 2024.

Some of the main changes to the Listing Rules are as follows:

• The removal of the distinction between ‘premium’ and ‘standard’ listing segments on the London Stock Exchange (LSE), which is to be succeeded by a new ‘Equity shares (commercial companies)’ category. Companies with a standard listing will be moved over temporarily to the ‘Equity Shares (Transition)’, where they will be “encouraged” to apply for transition to the Equity shares (commercial companies) category.
• Allowing companies to have multiple class share structures at admission to the LSE. Enhanced voting rights can only be held indefinitely by specified natural persons. Pre-IPO Institutional investors are subject to a maximum ten-year ‘sunset’ period after which the enhanced voting rights should expire.
• Companies will no longer be required to provide two years of historical financial information in a market notification for an acquisition that constitutes a significant transaction. Moreover, the FCA has maintained its earlier position that significant and related-party transactions should not require a shareholder vote.
• The threshold for the definition of a ‘substantial shareholder’ has been increased from a 10% interest to 20%.
• The removal of the requirement for there to be a relationship agreement in place between controlling shareholders and issuers. Nonetheless, it will still prove necessary for companies to operate independently of their controlling shareholder, and a new mechanism will be put in place to allow directors to give an opinion on a shareholder resolution put forward by a controlling shareholder when the director considers that the resolution is intended, or appears to be intended, to circumvent the proper application of the listing rules.

The UK and multiple class share structures

While many of the above will have ramifications for UK Plc, perhaps the most controversial change is the introduction of multiple class share structures to the UK landscape. Traditionally, the UK market has operated on the basis that one share equals one vote when resolutions are tabled at company meetings. Critics maintain that the addition of new classes of shares with superior voting rights undermines this founding tenet of the UK corporate governance regime.

In late June 2024, both the International Corporate Governance Network (ICGN) and a coalition of UK pension funds, led by Railpen, wrote open letters to the FCA expressing their concerns with the introduction of such structures. According to Railpen’s letter, multiple class structures would make the UK “less appealing as a destination for capital” and exacerbate current issues by making UK-listed companies less attractive to high-quality, long-term investors. Similarly, the ICGN letter called on the FCA to “retain the critical shareholder rights that have helped the UK build a reputation as the world’s ‘quality’ market and provided it with one of its few key differentiators”.

This followed earlier criticisms by Norway’s sovereign wealth fund, Norges Bank, which, in response to the FCA’s detailed proposals for reform, stated that it was concerned that efforts to boost listings by lowering corporate governance requirements would undermine the UK market’s reputation and ultimately not prove successful in increasing IPOs.

Moreover, specifically in relation to the introduction of multiple class share structures, Norges Bank noted that allowing for unequal voting rights on a broader scale would hinder the effectiveness of voting, and that “any deviation from the ‘one share, one vote’ principle should be contained and subject to appropriate safeguards”.

Consequently, some fear that the lowering of corporate governance standards in the UK market in an effort to become more competitive may prove counterproductive insofar as the doing away with such ‘best practice’ standards removes some of the outstanding features of the UK market and may, ironically given the intent of the changes, make it less attractive for companies looking at London as a listing location. In July, this position was echoed by investment charity, ShareAction, whose CEO called the changes to the Listing Rules “incoherent” on the grounds that the FCA has weakened protections for institutional investors at exactly the moment when the UK Government is trying to encourage pension funds to invest more in UK Plc.

Nonetheless, as others have highlighted, many of the institutional investors and pension funds that have concerns in relation to the so-called watering down of UK shareholder rights and protections do invest in other financial markets with lower corporate governance standards, and often where the use of multiple class share structures has been the norm for many years.

Indeed, this is not the first time that this has been noted by external observers. Earlier in June 2024, the Chair of Marks & Spencer, Archie Norman, blamed UK pension funds for the decline of the LSE on the grounds that they had cut their UK equity exposure to a shadow of what it had been just decades before. According to a release by the Office for National Statistics, published in December 2023, the proportion of UK shares held by UK insurance and pension funds has fallen dramatically since 1997 when the two sectors held a combined total of 45.7% of quoted shares. By 2022, the holdings of the two sectors had fallen to 4.2%, “the lowest proportion jointly held by them on record”.

As a result, it is not surprising that some observers contend that the recent arguments of some UK pension funds regarding the need to retain shareholder rights and protections ring hollow, given their apparent willingness to invest in other international markets despite the lower protections and corporate governance standards, coupled with their reduced ‘skin in the game’ in the UK market.

However, what is often missing from the UK debate is how multiple class share structures are viewed in the markets that the UK is seeking to emulate.

Multiple class share structures in other markets

Much has been made recently of the competitiveness and depth of US capital markets, with numerous companies worldwide choosing to list in the US, or to move their existing listings state-side, rather than list or stay in their own domestic stock exchanges. This has been especially prevalent in English-speaking countries, with both the UK and Ireland seeing a spate of delistings in recent years. Nonetheless, non-English speaking countries on the European continent have not been immune, with Linde completing its delisting from the Frankfurt Stock Exchange in favour of a single listing in New York in March 2023. More recently, in May 2024, French oil and gas giant TotalEnergies stated that it was “seriously” considering the possibility of a primary listing in the US (for more information, see: A Mid-season Review of the Ongoing UK Executive Remuneration Debate).

This has led to much soul searching and introspection in some markets regarding their competitiveness, and whether possible reforms are required to address this. For instance, in the UK, the possible allowing of multiple class share structures has often been presented as a boon to better attract tech IPOs to the LSE. Revolut Board Chair, Martin Gilbert, recently echoed this sentiment, welcoming the changes to the Listing Rules that would allow the founder-led Fintech company to consider an IPO in London.

Multiple class share structures have operated under various guises in other markets for many years. According to the Financial Times, 12% of US Russell 1000 companies utilise such structures, a modest increase from the 9% that did so a decade ago. Moreover, ISS data illustrates that approximately half of listed companies have such structures in Sweden, and, in France, more than twice as many companies have unequal voting rights than those that do not, although this is largely due to the widespread prevalence of loyalty shares, a different model of unequal voting rights.

Traditionally, multiple class share structures have been a rarity in the UK and Germanic markets (used here to describe Germany, Austria and Switzerland). The UK is not alone in reconsidering this approach, with Germany recently making amendments to its Stock Corporation Act, which, among other things, allows for the reintroduction of such structures.

Nonetheless, despite the fact that the use of multiple class share structures has generally been more widespread in other markets than the UK, this does not mean that all stakeholders are happy with this.

For instance, the Investor Coalition for Equal Votes (ICEV), which was launched by UK pension fund Railpen, the US-based Council of Institutional Investors, and several US pension funds, published a report in November 2023 calling for an end to multiple class share structures.

The ICEV report contends that the increase in the number of such structures in recent years has been particularly driven by certain sectors, such as technology, which has “historically enjoyed abundant access to capital and promised the rapid achievement of scale”. According to the ICEV, the power of founders in these sectors has grown considerably compared to the traditional ‘gatekeepers’ of the public equity markets (e.g., early-stage investors and underwriters). This in turn has “emboldened founders to secure disproportionate control”, which has undermined the dynamics of the financial ecosystem and allowed small groups of privileged insiders to maintain control of their companies, “while other shareholders (with less voting power) provide the majority of the capital and bear more of the financial risk”.

The report also outlines other concerns with such structures, which include the removal of a key accountability mechanism for poorly performing management and the undermining of the relationship between companies and shareholders to name just a few.

However, views on multiple class share structures not only differ from stakeholder to stakeholder, but also from market to market.

In an April 2024 article, Svenskt Näringsliv, Sweden’s Confederation of Swedish Enterprise, stated that it was concerned that proxy adviser recommendations “still sometimes ignore local and company specifics”. According to the confederation, “available empirical evidence does not support that dual class shares would be negative to the value development of companies – the experience is rather that this has served the Swedish market well”. The confederation has long held that multiple class share structures have been “an important and valuable feature of the Swedish stock market”.

The article followed criticism from Jacob Wallenberg, whose family investment vehicle owns large holdings in various companies, including Ericsson, Nasdaq, Electrolux and Saa, after ISS stated that from 2024 it would begin considering recommending against the re-election or discharge of directors at Continental European companies with multiple class share structures. According to Wallenberg, such an approach would risk undermining a specific feature of the Swedish stock market.

On the other hand, three-quarters of investors taking part in the 2023 ISS annual benchmark policy survey responded that they wanted ISS policy to consider the possibility of issuing adverse voting recommendations in relation to unequal voting rights and other poor governance structures.

The future of multiple class share structures

As illustrated above, the debate over the viability and effectiveness of multiple class share structures is still ongoing, not only in the UK, as numerous markets internationally grapple with concerns over their competitiveness, especially given the recent success of the US stock market.

Unsurprisingly, various stakeholders hold differing opinions on such structures, with asset owners often highlighting the loss of shareholder rights and protections, with others emphasising the need for domestic markets to remain competitive compared to their peers.

Less evident are the differing norms between markets. For instance, the one share, one vote principle has been a cornerstone of the UK corporate governance regime for many decades, which inevitably will make the introduction of multiple class share structures more controversial than for markets where unequal voting rights have a longer history. At the other extreme, the Swedish market has long operated with such structures, given its many family-owned companies, which have become a specific feature of the Nasdaq Stockholm.

In relation to the UK, it is yet to be seen if the FCA’s simplification of and changes to the listing regime will succeed in reinvigorating the UK’s capital markets and inject new life into the LSE, or, as some fear, have negative impacts and remove the UK’s competitive edge compared to other markets.