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30 May 2023

UK Listing Rules

How the UK can reopen for business

by Simon Compton, Associate Partner

A challenging environment

Headline figures from the first half of 2023 don’t make great reading for those with a vested interest in the success of UK capital markets. In the year to date, we have seen a grand total of six companies make the move to public ownership. This compares with over 50 IPOs to date in 2023 on US exchanges, a similar number in the Middle East and over 35 flotations on the main European stock markets.

In addition, a number of large UK listed companies including CRH PLC, Flutter Entertainment PLC and Ferguson PLC are looking at either moving to the US or adopting a dual listing. However, it is not all gloom and doom and whilst a move to the US makes good headlines, it is worth bearing in mind that IPO levels have always been cyclical with alternative funding options going in and out of favour depending on the wider economic outlook and investor risk appetite.

Help is at hand

Whilst the complete set of reasons behind the current drop in IPOs are many and varied, there is growing consensus that an excess of bureaucracy and restrictive legislation lie at the heart of the problem. The US stands in stark contrast with fewer regulations, significantly better executive remuneration packages and a 40-50% upside on valuation likely to be achieved upon listing when compared with the UK.

The good news is that the Financial Conduct Authority (“FCA”) is well aware of the problem and has unveiled a complete overhaul of the UK listing rules. This includes plans to scrap rules forcing a shareholder vote on transactions between UK-listed companies and related parties, as well as removing a requirement for firms to have three years of audited financial accounts before listing. These developments come on top of policy changes in late 2021 that allowed stock market debutants to reduce their free float requirements from 25% to 10%.

It is also worth bearing in mind that whilst updates are clearly needed to the UK’s regulatory framework, commentators have undoubtedly been a bit hasty in launching all-out attacks on an exchange that has proven itself time and again as a long term value creator and weathered many greater storms in the past.

London has been a welcome home for institutional money that has financed countless home-grown and international businesses from both established and emerging economies and across multiple sectors. This sort of history is not going to be undone by a few rather zealous headline writers.   

Balance over bureaucracy

Changes however are needed, and ones of this scale may appear at first glance to be a knee-jerk response that run the risk of undoing London’s hard-won reputation as the global gold standard for good governance amongst listed companies. However, this is not the time for slow and steady policy evolution, given the speed with which London is losing business to competing international stock exchanges. The FCA has grabbed the bull by the horns and should be applauded for its swift action. 

It is also the case that if you look at the myriad number of rules, regulations, codes and guidelines that have emerged over the past decade, it becomes apparent that London may well have gone too far in its attempts to protect shareholder interests. All the good intentions have resulted in an extremely burdensome regime that has had the effect of regulating many public companies into the ground.

Each rule and regulation appear sensible by themselves but when added together become a mountain of administration that arguably doesn’t leave enough room for management teams to focus on critical issues like value creation, innovation and productivity. The FCA has recognised this and their response will no doubt be seen as an important milestone in the years ahead.

A way forward

Immediate action is exactly what is needed as part of the UK’s response to the current drop in IPO activity. That is not to say that good governance shouldn’t remain of critical importance, but it is equally true that investing can’t be made completely safe and that risk has always been the price of growth.

What the FCA has done with these changes is effectively put the onus back on investors to play a more important role in holding companies to account and to run a stricter rule over those looking to come to market. The companies most likely to succeed in this new environment are those that can clearly demonstrate their investment case in a way that shows awareness and management of operational and financial risks in addition to an emphasis on maximising shareholder returns.

At Buchanan, our expertise lies in helping companies articulate the risks and opportunities associated with their equity story, as well as formulate coherent ESG strategies and frameworks that de-risk their proposition in the minds of investors.

In addition to the overhaul of the listing rules which will undoubtedly help lessen the bureaucratic burden on our listed companies, the UK also needs to look more broadly at factors like executive pay and corporate culture without sacrificing its hard won reputation for long term value accretion. It is only by taking a holistic and unified approach to this challenge that we will remain attractive to the corporate stars of tomorrow and maintain our hard-won status as a thriving shareholder democracy.

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