In an attempt to win back technology IPOs, which have been favoring the United States and its lax entry requirements, the UK government is now considering an exemption to its recently raised free float requirement for technology companies seeking entry to the London Stock Exchange’s main market.
As reported by the Financial Times, proposals currently being considered would allow tech companies to be included on the main market with a free float as low as 10%, well below the 25% hurdle set in December 2011 amidst concerns regarding the influx of foreign companies debuting in London and their questionable corporate governance standards. Investors may recall the 2011 conflict involving the major shareholders of Eurasian Natural Resources Corporation that resulted in the ousting of two of the company’s independent directors.
When free float levels were increased to 25%, the FTSE Policy Group noted that it would consider whether an even higher threshold would be appropriate in the future, and whether additional governance standards should be established for FTSE All Share constituents. Now, it seems that the desire to win back tech IPOs from the United States has some on Downing St. considering whether to look the other way when it comes to the free float of technology companies. While an FSA consultation regarding IPOs acknowledged shareholder concerns that free float standards should be used to regulate governance, it noted that the requirements were put in place to control liquidity rather than address any potential governance concerns.
It is important to note that low free float is not, on its own, indicative of poor corporate governance; however, Glass Lewis has raised concerns—particularly with regard to independent board oversight— at a number of such companies in past years. These companies, while not always controlled by a single party, are often heavily influenced by a small group of very large shareholders. With representatives sitting on the board and its committees, it certainly raises concerns that minority shareholders may be left behind when it comes to key board decisions.
This drive to lower the barriers to entry may ultimately prove to be a successful way to attract technology companies. However, it is worth considering whether companies who are drawn in by the low free float requirement should be admitted to the main market in the first place.
Investor groups such as the Association of British Insurers and the National Association of Pension Funds have noted that the reduced trading liquidity resulting from small free floats can lead to increased volatility, while dominant shareholders may be able to exert too much control to minority shareholders’ detriment.
Moreover, while many tech companies would prefer a main market listing, the Alternative Investment Market already provides a venue–though often viewed as riskier and more volatile–for companies seeking more relaxed regulatory restrictions. Perhaps the government should focus on upgrading the status of this junior exchange rather than lowering the standards for its premier equity market.