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What are dual class share structures?
Dual class share structures (DCSS) are arrangements involving the issuance of two kinds of shares in the same company, where one type of share confers more power than the other type of share.
DCSS can allow holders of the more powerful type of share to obtain voting control over a company that is disproportionate to their financial interest.
Such structures have been strictly regulated by the UK's Financial Conduct Authority (FCA) due to the principle of "one share, one vote" on the premium segment of the London Stock Exchange.
The shares that give founders voting control expire after a specified period (which has typically been three years in the UK) and then convert automatically into ordinary single vote shares.
From a takeover defence perspective, the idea is that the shares give founders sufficient control over the company to ward off potential acquisitions. By the time the DCSS period expires, the company should be sufficiently large and capitalised that it is less of an easy target for a hostile takeover.
What are the pros and cons?
DCSS give founding shareholders a way of retaining more control of their company, effectively enabling them to continue making all key decisions, for a limited period post-listing, while enjoying the benefits of being a public company.
For the stock exchange, offering such structures allows them to attract highly-valued, fast-growing companies with motivated management teams.
The main downside of DCSS has been that, pursuant to Listing Rule (LR) 9.2.21R, companies with such structures are prohibited from listing on the London Stock Exchange's premium segment – the UK gold standard for corporate governance (there are no restrictions on DCSS on the standard segment).
Not being part of the premium segment means companies cannot be included in FTSE indices and accordingly their shares will not be bought by tracker funds.
Some investors are also suspicious of DCSS. For example, Deliveroo’s London IPO in March 2021 (see below) was attacked by UK fund managers because of the control retained by its founder.
Who has used DCSS in the UK?
Despite the restrictions, companies have used DCSS arrangements in the UK, including a handful of notable recent examples.
In September 2020, when ecommerce company The Hut Group listed in London, the FCA permitted its founder Matt Moulding to retain a "founder share" (also known as "golden share"), giving him the ability to veto a hostile takeover outright.
Following this, in March 2021, food delivery business Deliveroo floated in London with two classes of share, one of which carried an ordinary single vote per share while the other entitled Deliveroo's founder, Will Shu, to 20 votes per share.
This gave Shu control over 57% of the company’s voting rights, despite holding just under 7% of the company's shares.
In July 2021, UK life sciences start up Oxford Nanopore sought shareholder approval to give its CEO, Gordon Sanghera, a limited number of anti-takeover shares allowing him to block hostile international takeover attempts.
All three of the Hut Group's, Deliveroo's and Oxford Nanopore's respective DCSS expire after three years.
What might change?
Both the UK Listing Review and the Kalifa Review of UK Fintech, published in March and February 2021, respectively, recommended amending the UK Listing Regime to enable companies listed on the premium segment of the London Stock Exchange to adopt DCSS.
The reviews highlighted that the prohibition of DCSS is a barrier to listing in the UK, especially given the changing nature of companies – and their founders – coming to the public markets.
Expanded participation for specified weighted voting rights holders
At present, under LR 9.2.21R holders of unlisted shares with "specified weighted voting rights" (i.e., more than one vote per share) are precluded from voting on matters relevant to a premium listing.
Dual class share structures (DCSS) are arrangements involving the issuance of two kinds of shares in the same company, where one type of share confers more power than the other type of share.
DCSS can allow holders of the more powerful type of share to obtain voting control over a company that is disproportionate to their financial interest.
Such structures have been strictly regulated by the UK's Financial Conduct Authority (FCA) due to the principle of "one share, one vote" on the premium segment of the London Stock Exchange.
The shares that give founders voting control expire after a specified period (which has typically been three years in the UK) and then convert automatically into ordinary single vote shares.
From a takeover defence perspective, the idea is that the shares give founders sufficient control over the company to ward off potential acquisitions. By the time the DCSS period expires, the company should be sufficiently large and capitalised that it is less of an easy target for a hostile takeover.
What are the pros and cons?
DCSS give founding shareholders a way of retaining more control of their company, effectively enabling them to continue making all key decisions, for a limited period post-listing, while enjoying the benefits of being a public company.
For the stock exchange, offering such structures allows them to attract highly-valued, fast-growing companies with motivated management teams.
The main downside of DCSS has been that, pursuant to Listing Rule (LR) 9.2.21R, companies with such structures are prohibited from listing on the London Stock Exchange's premium segment – the UK gold standard for corporate governance (there are no restrictions on DCSS on the standard segment).
Not being part of the premium segment means companies cannot be included in FTSE indices and accordingly their shares will not be bought by tracker funds.
Some investors are also suspicious of DCSS. For example, Deliveroo’s London IPO in March 2021 (see below) was attacked by UK fund managers because of the control retained by its founder.
Who has used DCSS in the UK?
Despite the restrictions, companies have used DCSS arrangements in the UK, including a handful of notable recent examples.
In September 2020, when ecommerce company The Hut Group listed in London, the FCA permitted its founder Matt Moulding to retain a "founder share" (also known as "golden share"), giving him the ability to veto a hostile takeover outright.
Following this, in March 2021, food delivery business Deliveroo floated in London with two classes of share, one of which carried an ordinary single vote per share while the other entitled Deliveroo's founder, Will Shu, to 20 votes per share.
This gave Shu control over 57% of the company’s voting rights, despite holding just under 7% of the company's shares.
In July 2021, UK life sciences start up Oxford Nanopore sought shareholder approval to give its CEO, Gordon Sanghera, a limited number of anti-takeover shares allowing him to block hostile international takeover attempts.
All three of the Hut Group's, Deliveroo's and Oxford Nanopore's respective DCSS expire after three years.
What might change?
Both the UK Listing Review and the Kalifa Review of UK Fintech, published in March and February 2021, respectively, recommended amending the UK Listing Regime to enable companies listed on the premium segment of the London Stock Exchange to adopt DCSS.
The reviews highlighted that the prohibition of DCSS is a barrier to listing in the UK, especially given the changing nature of companies – and their founders – coming to the public markets.
Expanded participation for specified weighted voting rights holders
At present, under LR 9.2.21R holders of unlisted shares with "specified weighted voting rights" (i.e., more than one vote per share) are precluded from voting on matters relevant to a premium listing.
These matters set out in paragraph 5.32 of the FCA's CP21/21 consultation paper include:
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Approving a Class 1 transaction requiring shareholder approval under LR10.5.1R;
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Approving significant transactions under LR10;
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Approving a cancellation of listing under LR5.2R; and
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Approving related party transactions under LR11.
The FCA is proposing to amend the Listing Rules so that holders of specified weighted voting rights shares can vote on these matters, which are currently reserved for shareholders of premium-listed shares.
Five-year sunset period
The entitlement for specified weighted voting rights shareholders to vote on matters relevant to a premium listing would be limited to five years from the date the shares were admitted to premium listing. Further, participation would be on a one share, one vote basis, regardless of the shareholder's designated voting weight.
To extend this five-year period, the company would have to seek shareholder consent, change segment, or de-list entirely. This will only be available for issuers seeking a premium listing for the first time.
The FCA believes the five-year sunset period strikes an appropriate balance between defending the company against opportunistic takeovers in the early years post-listing and protecting against permanent exposure to moral hazard by minority shareholders.
Limited scope to apply weighted voting rights
It is important to note that the only circumstances in which specified weighted voting rights would carry their designated weighting is:
Five-year sunset period
The entitlement for specified weighted voting rights shareholders to vote on matters relevant to a premium listing would be limited to five years from the date the shares were admitted to premium listing. Further, participation would be on a one share, one vote basis, regardless of the shareholder's designated voting weight.
To extend this five-year period, the company would have to seek shareholder consent, change segment, or de-list entirely. This will only be available for issuers seeking a premium listing for the first time.
The FCA believes the five-year sunset period strikes an appropriate balance between defending the company against opportunistic takeovers in the early years post-listing and protecting against permanent exposure to moral hazard by minority shareholders.
Limited scope to apply weighted voting rights
It is important to note that the only circumstances in which specified weighted voting rights would carry their designated weighting is:
(i) On the removal of the holder of specified weighted voting rights shares as a director; and
(ii) Following a change of control, which the FCA sees as an effective safeguard in itself against a potential takeover during the five-year period.
Further, this exception would only apply to shares that meet the following conditions:
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They entitle the holder to more than one vote per share to remove a director;
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They permit the shareholder to exercise weighted voting rights upon a change of control in all circumstances;
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The ratio of weighted voting rights to rights of ordinary shares is capped at 20:1;
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They require such shareholders to be directors; and
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They include mechanism for the end of the sunset period (i.e. conversion to ordinary shares after five years).
UK vs US
While the proposals, if adopted, represent a significant relaxation of the UK Listing Rules on DCSS, they are still more restrictive than the approach typically taken in the US – arguably the UK's main rival for large IPOs.
In the UK, under the proposed reforms, holders of specified weighted voting rights will be limited to directors of the company, whereas in the US it is common for all pre-IPO shareholders to be given weighted voting rights.
Plus, while the matters on which holders of weighted voting rights are limited in the UK to those concerning takeovers and their own directorship, in the US holders usually have the right to vote on all matters other than certain limited areas intended to protect public shareholders.
Finally, whereas the UK sunset period could be extended to five years, the US has seven-year sunset clauses as standard.
This article was authored by Jack Mason-Jebb, corporate solicitor at Fieldfisher.
While the proposals, if adopted, represent a significant relaxation of the UK Listing Rules on DCSS, they are still more restrictive than the approach typically taken in the US – arguably the UK's main rival for large IPOs.
In the UK, under the proposed reforms, holders of specified weighted voting rights will be limited to directors of the company, whereas in the US it is common for all pre-IPO shareholders to be given weighted voting rights.
Plus, while the matters on which holders of weighted voting rights are limited in the UK to those concerning takeovers and their own directorship, in the US holders usually have the right to vote on all matters other than certain limited areas intended to protect public shareholders.
Finally, whereas the UK sunset period could be extended to five years, the US has seven-year sunset clauses as standard.
This article was authored by Jack Mason-Jebb, corporate solicitor at Fieldfisher.
