Dual class share structures could help lure Europe’s best founder-driven businesses to the London market, but challenges remain.
By Sarah Axtell, Tad Freese, Chris Horton, Rick Kline, Anna Ngo, Koushik Prasad, David Walker, Tom Evans, and Catherine Campbell
Listing of dual class share structures, which give certain owners (usually founders, employees, and pre-IPO investors) enhanced voting rights over other public shareholders, are increasingly common in the US markets as a strong pipeline of founder-driven tech companies goes public. The UK has now seen several dual class share structures, including most recently the £5.4 billion IPO of The Hut Group, which had a “special” share for the founder. With the UK government keen to increase the marketability of UK listings following Brexit, we anticipate that US dual class deal architecture is likely to be featured on a growing number of London listings — a development that could benefit PE firms and founder managers seeking to retain a greater governance role post-IPO.
The US Approach
US deals, such as Bain’s listing of Canada Goose and the recent listings of Airbnb and Snowflake, demonstrate a pathway for investors and PE firms to take a portfolio company public, allowing founders and other pre-IPO shareholders to retain control in the listed company. While dual class share structures on US IPOs are not new, they have become increasingly marketable in the current buoyant market, and are popular with founders seeking to guard against hostile takeovers and activist shareholders.
An Evolving European Landscape
Two changes mean that PE deal makers will need to become familiar with this share architecture in the UK, notwithstanding that they are not currently permitted on premium London listings.
First, dual class share structures are already permitted on standard UK listings. While historically many companies have preferred the prestige and FTSE 100 index eligibility associated with a premium listing, this is changing. Notably, companies such as The Hut Group (London’s biggest-ever tech IPO) and Sir Martin Sorrell’s S4 Capital both opted for standard listings and provided for dual class share structures.
Second, dual class share structures are permitted on many European stock exchanges, including Euronext Amsterdam, and were introduced in Italy in 2020.
On 3 March 2021, the UK Listing Review led by Lord Jonathan Hill was published, making a raft of recommendations to the UK government to reform the UK’s listing regime to both strengthen and increase the competitiveness of the UK’s capital markets. Among the recommendations is to permit premium listed issuers to have dual class share structures for a maximum of five years following an IPO and with a maximum weighted voting ratio of 20 to 1 to provide a way for founder-led companies to evolve and grow, without being immediately vulnerable to a takeover.
As a host of tech companies line up for IPOs in the coming years, if implemented, such dual class share structures may well help lure Europe’s best founder-driven businesses to the London market and ensure that Britain regains its advantage in the global markets.
The PE Opportunity
It remains to be seen whether dual class share structures, particularly those recommended in the UK Listing Review, will enable PE investors retaining a stake post-IPO to preserve controls over the company in order to guide post-IPO performance and the realisation of shareholder value, or allow pre-IPO management incentivisation structures to roll forward into the listed entity.
What Are Dual Class Share Structures?
- Involve two (or more) different classes of shares with differential voting rights
- Founders and other pre-IPO holders are able to maintain voting control of the publicly listed company through holding shares with enhanced voting rights (often 10:1 to shares sold to the public, though this has started to vary in recent US deals)
- All other public shareholders have lesser voting rights
- Founders can concentrate on the company’s long-term strategy, growth, and performance without having to keep one eye on short-term targets and the risk of shareholder activism while the company is still in the high-growth phase
- Founders have control over takeover attempts and other key decisions in the company
- Goes against the “one-share, one-vote” principle, which has long been seen as a core bedrock of investor protection in the UK Founders with enhanced voting rights could dominate decision- making, with little or no representation on policy or strategy for those that provided much of the company’s capital, contributing to an erosion of accountability
- Conflicts could arise between entrenched founders and management and other shareholders
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