TheCorporateCounsel.net

Given the wailing and gnashing of teeth over dual-class structures in the US by proxy advisors & investor representatives, it may come as a surprise to learn that UK regulators recently adopted a rule change permitting dual-class companies to list on the LSE. An ISS report on the change notes that it was opposed by many prominent UK & European institutional investors, but also acknowledges a big reason why their objections didn’t carry the day:

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.

ISS goes on to argue that UK regulators should’ve paid more attention to investors’ negative reaction to multi-class structures in jurisdictions where they’re permitted when deciding whether to permit listings on the LSE.  On the other hand, maybe regulators just paid more attention to investors’ actions than their words, since they still seem to gobble up dual class companies’ IPOs whenever they get the chance.

– John Jenkins