What are the changes to the rules around dual class share structures?

On July 29, 2024, the Financial Conduct Authority (FCA) introduced significant amendments to the UK listing rules, marking a substantial shift in the regulatory landscape for companies seeking to list on the London Stock Exchange (LSE). These changes reflect a more permissive approach to weighted voting rights and sunset clauses, providing greater flexibility for companies and shareholders.

Changes to Weighted Voting Rights and Sunset Clauses

Previous Rules (Pre-July 29, 2024):

Under the pre-existing regulations, companies were subject to several constraints regarding weighted voting rights:

1. Sunset Period: There was a maximum sunset period of five years from the date of admission during which enhanced voting rights could be exercised. After this period, the enhanced rights would expire.
2. Voting Power: Enhanced voting rights were limited to specific scenarios, such as votes on the removal of the holder as a director or on matters following a change of control, which were intended to act as a deterrent against takeovers.
3. Maximum Voting Right Ratio: The maximum ratio for weighted voting rights was set at 20:1, restricting the extent of enhanced voting power that could be granted.
4. Holder Requirements: Holders of specified weighted voting rights shares were required to be directors of the company. These shares could only be issued to directors, investors, shareholders, employees, or entities controlled by these individuals. Additionally, these shares could only be transferred to beneficiaries of a director’s estate.

New Rules (Post-July 29, 2024):

The FCA's updated regulations introduce several key changes:

1. Removal of Sunset Clauses: The new rules eliminate the time-related sunset period for enhanced voting rights, allowing for the continued exercisability of these rights indefinitely. The only exception is for pre-IPO institutional investors, who are uniquely subject to a maximum 10-year sunset clause.
2. Enhanced Voting Power: The scope of enhanced voting power has been broadened. It now includes:
• Approval of reverse takeovers.
• Election and re-election of independent directors for companies with a controlling shareholder.
• Any other matters not explicitly covered by the Listing Rules.
3. Removal of Maximum Voting Right Ratio: The previous cap of 20:1 on weighted voting rights has been removed, providing greater flexibility in the allocation of voting power.
4. Holder Requirements: Specified weighted voting rights shares can now be issued to a broader range of individuals:
• Directors of the applicant.
• Investors or shareholders.
• Employees of the applicant.
• Entities established for the sole benefit of or solely owned and controlled by any of the aforementioned individuals.
• In the case of a sovereign-controlled commercial company, to a sovereign controlling shareholder.
• Pre-IPO institutional investors, with the specific 10-year sunset clause.
5. Transfer Restrictions: The transfer of specified weighted voting rights shares is now less restricted. Transfers are permitted to individuals or entities established for the sole benefit of or solely owned and controlled by the holder, rather than being limited to the director’s estate beneficiaries only.

Implications for Companies and Shareholders

These regulatory changes reflect a significant shift towards a more flexible and inclusive framework for weighted voting rights. Companies listed on the LSE, such as HSBC Holdings plc (HSBA) or AstraZeneca plc (AZN), now have more leeway in structuring their voting rights and shareholder arrangements. The removal of stringent sunset clauses and voting right ratios allows companies to adapt their governance structures more freely to their strategic needs and shareholder dynamics.

Furthermore, the broader eligibility for holders of weighted voting rights shares, including employees and pre-IPO institutional investors, provides a more diverse range of potential stakeholders with enhanced voting power. This could influence corporate governance and strategic decision-making, as companies like Diageo plc (DGE) or GlaxoSmithKline plc (GSK) consider how these changes impact their shareholder structures and control mechanisms.

In summary, the FCA's reforms to the UK listing rules, effective from July 29, 2024, introduce greater flexibility in the use of weighted voting rights and sunset clauses. The changes are designed to accommodate a broader range of stakeholders and allow companies more latitude in their governance arrangements. As companies navigate these new rules, the impact on corporate governance and shareholder influence will become increasingly evident.