There have been a few recent instances of companies listing a minority interest on the London Stock Exchange only to withdraw a few years later. A current example is Essar Energy, the Indian oil refinery company which sought and obtained a premium listing in 2010. With recent developments in Russia and the Ukraine a number of other Russian companies also listed in London may consider following suit.
The core complaint is that the companies showed poor compliance cultures often resulting in allegations of conflicts of interest or even worse. The net result is that after a few years, the company considers it no longer viable to sustain the cost and scrutiny of a listing and go back to being private. The investors want out but bemoan the fact that their investments in the floated minority interest is being materially undervalued – i.e. they are being paid less than they originally invested and more in fact than the company is truly worth at the time of privatisation.
Before we consider the recently proposed changes introduced by the UK Listing Authority (UKLA), it is worth considering the above. Firstly, like all good headlines and sweeping statements, the above is a clear over-simplification.
The motivation for these overseas companies to come to London was presumably in part to:
- Access new (and deeper) sources of capital – existing and future
- Raise the profile of the company and presumably its value
- To realise some investment value
- Implement ‘Western’ standards of compliance and controls
To undertake a UK listing simply to exploit UK pension funds alone is not credible – the cost and effort involved in the listing is too great. Also any professional investor knows that illiquid assets (such as minority interests) attract a discount (sometimes a very significant one) – so it is not surprising that the majority shareholders seek to buy back the shares at a supposed ‘reduced’ value. They are not, presumably, inclined to overpay to try to win back friends.
The main problem was that UK regulators let standard slip (who doesn’t recall City grandees extolling the virtues of ‘light touch regulation’ as opposed to the heavy handed US system) and bankers like exploiting such weaknesses.
So what has the newish Financial Conduct Authority (FCA) announced to protect minority shareholders? Its proposed new rules will increase the duties and obligations that the Investment Banking Sponsor has in respect of the due diligence relating to companies it takes to market. The proposed changes are still undergoing the ins and outs of a consultation process, however, the key changes are likely to include:
- Three years of relevant experience – previously this was a broader requirement that they demonstrate a range of recent experience in providing advice
- Demonstrated sector/industry experience
- Potentially the phasing out of joint sponsors
This all sounds still pretty light touch. Who wouldn’t want to see their advisers have significant experience in both terms of years in the job and of the industry at the heart of the listing? Sponsors are also meant to ‘ act with due care and skill’ and must ‘ensure that any communication or information it provides to the FCA in carrying out the Sponsor service is, to the best of its knowledge and belief, accurate and complete in all material respects’. Again who wouldn’t want this to be the case – not much of a radical change there.
The key lies in how banks are remunerated for their work – typically they are paid on success with success being the listing itself. It would take a rare banker to advise his or her client that they are not ready or even at all suited to list and thereby forego the big success fees. This is not to say such bankers do not exist – but experience and the benefit of hindsight speak for themselves. So remuneration lies central to the issue – a rethinking of success and a deferral element would align interests more meaningfully.
Also, there was a suggestion, not seriously considered, of an incubation period. Actually a pretty good idea – a listing lite – where investors and companies could see whether a full premium listing makes sense at the end of a given period.
Other areas to consider – genuinely enhanced voting (and veto?) rights for independent directors to address key risks – e.g. board composition, executive pay, M&A (in particular related party transactions).
The last point would be for a genuinely independent pre-listing assessment of potential ‘bet the company’ risks – rather than the usual materiality driven legal and financial diligence – to be undertaken, covering for example, those risks which relate to bribery, fraud, sanctions etc.