Notwithstanding London’s status as a global financial center, the London Stock Exchange’s (LSE) inflexible listing rules constrain the city’s ability to attract high-growth tech companies. In contrast with NASDAQ and the New York Stock Exchange (NYSE), the LSE Main Market remains dominated by traditional industries—such as financial services, mining, and energy—that have experienced sluggish growth in recent years.
Cumbersome LSE regulations—such as the rule preventing companies from issuing stocks with differentiated voting rights—are a significant reason why fast-growing international companies—especially leading tech companies—have been reluctant to offer initial public offerings in London. Between 2015 and 2020, “London accounted for only 5% of global IPOs,” according to Barron’s—a share that might decline further unless British regulators reform the LSE’s listing rules.
In a new government report, Lord Jonathan Hill recommends revamping the LSE’s current listing rules. The report makes several important recommendations, such as urging British regulators to allow dual-class ownership, which would enable companies to issue “two or more classes of shares” with differentiated voting rights. For example, many leading U.S. companies—including Alphabet, Facebook, Ford, and Berkshire Hathaway—offer stocks with differentiated voting rights.
The LSE Main Market’s current rule of “one share, one vote” for its premium tier means that each stockholder gets the same voting rights in a company’s management. While this practice may sound appealing, it means that founders and executives risk ceding control of management by selling shares during IPOs.
Dual-class ownerships solves this problem by introducing multiple classes of stocks—whereby “a minority of the shares, held by the company’s founders and executives, have special voting rights that provide their holders with effective control.” In contrast, the “majority of the company’s stock, which has regulator voting rights, is held by outside investors.” This structure allows the founders to raise initial capital and scale up companies without losing managerial control.
Dual-class ownership also increases the independence of founders and executives by insulating them from market volatility and short-termism by institutional investors. Such insulation is particularly critical for British tech firms, which have traditionally faced much higher short-term investor pressure than their American counterparts. That is the case because, compared to American investors, British and European investors tend to be less familiar with technology business models. Consequently, a dual-class ownership structure can allow U.K.-based companies to focus on long-run growth instead of maximizing short-term profits.
Recognizing the benefits of dual-class ownership, NASDAQ and NYSE allow tech companies to issue different share classes during IPOs. As a result, leading American, European, and Chinese tech companies—including Google, Spotify, and Tencent—choose NASDAQ and NYSE for initial public offerings. New York’s flexibility regarding dual-class structures—along with the U.S. startup ecosystem and funding availability—has played an essential role in ensuring New York’s leadership in tech IPOs.
Most recently, financial regulators in Hong Kong and Singapore have also decided to allow dual-class shares in the Hong Kong Stock Exchange and the Singapore Exchange, respectively. By allowing dual-class structures, Hong Kong and Singapore seek to attract more tech companies—particularly U.S.-listed tech companies from mainland China—as Sino-American relations sour.
Critics of dual-class ownership—especially institutional investors—argue that it will damage corporate governance and weaken investor rights in Britain. Notwithstanding anecdotal examples of executive overreach from Facebook and WeWork and claims by BlackRock and the CFA Institute, there is no conclusive evidence to suggest that companies with a dual-class ownership structure exhibit lower corporate governance standards than companies with a general voting structure. Nevertheless, to assuage investor concerns, the U.K. government can adopt the Hill report’s recommendations to introduce a “maximum weighted voting ratio of 20:1” and a five-year sunset clause for dual-class shares. However, because such safeguards will reduce the effectiveness of companies with a dual-class ownership structure, British regulators should exercise caution in implementing such measures.
Likewise, although dual-class ownership provides outside investors with weakened voting rights than companies with a general voting structure, investors can choose whether to invest in such companies. Furthermore, investors can sell their shares if they have reasons to doubt the business strategy and managerial ability of the company’s founders and executives. Therefore, the case against dual-class ownership based on the rights of institutional investors remain weak.
As the Biden administration and the European Commission adopt an increasingly antagonistic tone toward technology companies, the Boris Johnson government have a competitive opportunity to establish London as a global tech hub. Attracting fast-growing tech companies will ultimately require a range of initiatives, such as improving tax incentives for investment. Allowing dual-class ownership for LSE-listed companies should be a core part of that strategy.