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London listing used to mean you had been signed up by a merchant bank and ticked by the London Stock Exchange as being suitable. You were a member of a rather exclusive club. While
UK institutional investors would take your listing as a mark of quality assurance, they would take a large part of their comfort from the relationships they had with the bank that brought you to market. Among advisers there was a common understanding of due diligence and what to do to groom the company for listing. Very little of it was written down. Unlike the position in the
US you were most unlikely to be sued if things went wrong.
While London listings will typically now have an overlay of a US-driven approach to disclosure and diligence, elements of the traditional environment persist for primary listings through the sponsor regime and continue to give the London market its distinctive character.
Through the Accountants Long Form and related reports a depth of preparatory work is done on systems and controls as well as the company’s ability to monitor and project its performance and comply with its regulatory responsibilities. This does not have an immediately obvious equivalent in other markets.
However, alongside a London primary listing, other routes to a ‘London listing’ are growing more popular and people are rightly asking whether the old order should be preserved.
It is against this background that the Financial Services Authority (FSA) will publish a consultation paper later this year on the regimes for listing equity in London.
London faces a real challenge. Should it hold out to preserve elements of the traditional model? Is there a value in retaining and re-enforcing a perception that there is a higher bar for a London primary listing than is required by most other European Union (EU) markets? Will the market over time recognise that? And will there be natural demand for the higher standard or should the regulator impose a mandatory higher standard for some companies?
The debate is complicated by the question of index inclusion. Increasingly it seems the question for investors is not so much where and how you are listed, but whether you will be included in the FTSE UK indices, for which you need to have a primary listing as well as being a ‘UK’ company.
But how do you define a UK company? Must it be a PLC? Or should most of its business operations — or share dealings — be in the UK?
The FTSE recently published updated guidance on eligibility criteria, which puts much greater emphasis on the adoption of UK-style corporate governance.
So you now have the odd position that to get the full benefit from the premium route to a London listing, it is not enough to have the UK Listing Authority and a sponsor sign off on you for a primary listing. Your corporate governance also has to be signed off by the FTSE committee, which only meets four times a year and is reluctant to give a company a binding assurance as to whether it will be admitted to indices in advance of their listing. This deters some companies from incurring the expenditure of a London initial public offering.
We think the core elements of the model for a London primary listing should be preserved — whether they are written or unwritten. The success of the large foreign companies, such as SABMiller, Kazakhmys and Xstrata, that have chosen to go this gold-plated route speaks for itself. But London cannot ignore the fact that Europe offers EU directive minimum markets that can compete with its markets, so we do not think steps can or should be taken to limit access to equivalent markets in London.
However, the distinctions should be made clearer to investors and the first and main step would be to reinforce what is special about a
London primary listing rather than dilute it. There is a place for the higher diligence and more extensive grooming steps that such a listing requires. And there will continue to be a role for the FTSE committee. However, it should make its rules clearer and provide better assurance to companies as to whether they will be included in the FTSE indices if they meet the relevant conditions.
John Lane and Charlie Jacobs are corporate finance partners at Linklaters.
