The Globalisation of Securities Litigation: The Challenges and Opportunities
1. Introduction
Age and experience may allow us to learn from past mistakes. Unfortunately, this is not always the case for market regulators. In the U.K., we are once again reminded that no problem is so bad that government or regulatory intervention can’t make it worse.
In July 2024, the Financial Conduct Authority (FCA) introduced the most significant overhaul of the U.K.’s listing regime in more than 30 years, and in doing so, implemented reforms that weakened previously sacro-sanct investor protections. This shift risks encouraging companies with weaker governance standards to take advantage of the looser requirements and list in the U.K. Let’s not forget, we’ve been here before!
2. Background to changes
In 2024, the London Stock Exchange (LSE) witnessed a historic low in initial public offerings (IPOs), with only 18 companies making their debut. This figure represents a 22% decrease from 2023, and a 60% drop compared to 2022. The year also saw 88 companies delist or transfer their primary listings from the LSE, marking the largest exodus since the global financial crisis, with many citing declining liquidity and lower valuations in London compared to markets like the U.S.
This was accompanied – as a cause or consequence – by U.K. pension funds markedly reducing their allocations to domestic equities over recent decades. As of 2024, only 4.4% of U.K. pension assets were invested in U.K.-listed shares, a steep decline from over 50% in the early 2000s. This allocation is among the lowest compared to other developed pension systems, with only Canada, the Netherlands, and Norway having lower domestic equity exposures.
To counter these developments – and clearly encouraged by some stakeholders and government-backed strategic reviews – the FCA led a reform process to revitalise the U.K. capital markets by addressing “the overly-prescriptive regulation which was seen as stifling entrepreneurial risk-taking and deterring the very kind of innovative companies the U.K. needs to attract.”
3. Key changes in the listing rules Consolidation into a single listing category
The previous dual structure of ‘Premi-um’ and ‘Standard’ listing segments has been replaced with a unified category called Equity Shares of Commercial Companies (ESCC). This is designed to make the U.K. listing process more accessible, particularly for high-growth and founder-led companies.
Shift to a disclosure-based regime
The FCA has moved towards a more disclosure-oriented approach, reducing the need for mandatory shareholder votes on significant transactions and related party transactions.
Relaxed eligibility criteria
To encourage more companies to list in the U.K., the FCA has eased certain eligibility requirements:
• Free float requirement: Reduced from 25% to 10%, allowing founders and early investors to retain greater control post-IPO.
• Track record: Elimination of the three-year revenue track record requirement.
• Working capital statements: Removal of the need for a clean working capital statement at the time of listing.
Enhanced flexibility for dual-class share structures
The new rules permit greater flexibility around dual-class share structures, enabling founders and key stakeholders to maintain enhanced voting rights.
Introduction of additional listing categories
Beyond the ESCC, the FCA has introduced additional listing categories to address the varied needs of issuers, including a dedicated category for shell companies, specifically designed for special purpose acquisition companies (SPACs).
4. Why does this matter?
Investor rights are the cornerstone of a healthy and transparent financial market. These rights include access to accurate information, protection against undue influence, and the ability to hold corporations accountable for their decisions. Over the years, the U.K. has earned a reputation as a global leader in corporate governance and investor protection, supported by a stable regulatory framework and a highly developed financial services sector.
The protection of all investors, including minority shareholders, has been vital in maintaining the attractiveness and integrity of the U.K. markets. Confidence that investors’ rights are protected, together with the high standards inherent in a premium listing, served to lower the cost of capital for companies, and underpinned the U.K.’s attractiveness for raising capital. Central to the U.K.’s listing regime has always been the one-share, one-vote principle, which remains a sacrosanct, central tenet to accepted global corporate governance standards.
5. Back to the future: Governance Groundhog Day?
In 2007, Eurasian Natural Resources Corporation (ENRC) was allowed to list on the London Stock Exchange with an 18% free float. Six years’ later, the company exited the stock market amidst criticism over its governance and was subsequently investigated by the Serious Fraud Office.
In 2013, under pressure from investors, the FCA updated the listing rules to better protect minority shareholders from companies listing with small free floats. This was to promote market integrity and empower minority shareholders to hold the companies they invest in accountable.
Are we now heading backwards in terms of investor protections?
6. If we build it, will they come?
While it was clear that action was needed to address the decline in IPO activity in London, many institutional investors and their representative bodies have raised concerns that the FCA may have gone too far, risking the erosion of investor protections in an effort to boost market competitiveness. There is also a broader concern that, although the diagnosis of the problem is largely accurate, the jury is still out on the proposed remedies.
There are reasons to be cynical. For example, in an effort to attract Saudi Aramco’s anticipated $2 trillion IPO to London, the FCA implemented significant changes to its listing rules in 2018, but Saudi Aramco ultimately chose to instead list on the Saudi stock exchange.
There are, indeed, many reasons why the U.K. has been unsuccessful in attracting IPOs, particularly from innovative and high growth companies, which are unlikely to be addressed by the recent reforms:
• Companies often achieve higher valuations in the U.S., particularly in tech and high-growth sectors. U.K. markets are perceived as more conservative, with investors favouring dividends and profitability over growth potential.
• The U.K.’s departure from the EU reduced its appeal as a gateway to European capital. London is now seen as less central to global finance than it once was.
• Compared to the U.S., the U.K. has a relatively risk-averse investment culture, with less retail participation in IPOs. Pension funds and institutional investors in the U.K. have also shifted away from equities towards bonds and alternative assets.
• Recent high-profile de-listings (e.g., Armaco choosing Nasdaq over LSE) have damaged sentiment. The market is seen by some founders and advisers as in decline, making it a self-reinforcing cycle.
• U.S. markets, with deep capital pools, greater liquidity, and a supportive investor base, are seen as more attractive.
• The LSE is heavily weighted toward traditional sectors (finance, mining, energy) rather than growth and tech industries. This limits peer benchmarking and can discourage tech firms from listing in London.
7. The law of unintended consequences
In a market that was once a beacon of corporate governance, the road ahead for U.K. – and indeed global – governance standards and investor protections now appears uncertain and potentially at risk.
As the U.K. embarks on these listing rule reforms, it could set in motion a potential ‘race to the bottom’ as competition increases amongst jurisdictions seeking to attract new listings. This could result in corporate governance standards and investor protections to be further diluted, not only in the U.K., but globally.
With the demise of the premium listing, which was a prerequisite for index inclusion for many U.K. index providers, there is a risk that companies with alternative governance and voting structures may now appear, unbeknownst, in the portfolios of index fund investors’ portfolios.
Despite earlier hopes of an IPO revival in 2025, signs of a positive turnaround in the U.K. appear premature. Ironically, the most high-profile potential listing is also one of the most controversial from a governance perspective. Online fast-fashion giant Shein is now eyeing London after facing pushback from U.S. regulators. This raises a fundamental question: is the drive to reinvigorate the U.K.’s capital markets coming at the expense of governance standards?
Time will tell whether the trade-off between competitiveness and governance was worth it.
Dr. Summerfield is Pomerantz’s Director of ESG & U.K. Client Services.