Law firm interviewed: Linklaters
London, once a marquee fundraising destination where big-name companies vied for a place, has in recent years struggled to attract listings from high-growth start-ups to large conglomerates as lack of liquidity and tight regulations dimmed the prospects for returns.
In a bid to rejuvenate London’s anaemic capital markets, the UK’s Financial Conduct Authority (FCA) approved the biggest overhaul of listing rules in three decades. The new regime has come into force on July 29.
Chinese companies, in particular, have been the focus of this reform. With China's growing economic influence and the increasing number of innovative Chinese firms seeking international exposure, the UK aims to position itself as an attractive alternative to other global financial hubs.
The new rules are designed to accommodate the unique characteristics of Chinese businesses, including their governance structures and growth patterns, potentially making London a more viable option for Chinese firms looking to list overseas.
WHAT ARE THE NOTABLE CHANGES?
The new listing regime has introduced a slew of changes including new listing categories, greater flexibility around dual-class share structures, and independent from controlling shareholders.
John Xu, corporate partner at Linklaters based in Hong Kong, says the changes aimed at making the listing framework more attractive to investors and issuers by removing the previous “two-tier” listing standards for most companies.
“Although this new category is slightly more onerous than the former standard listing, it is less onerous for issuers than the former premium listing, and more aligned with international standards,” notes Xu.
A new category of secondary listing for international companies also offers the option of a more relaxed listing regime for eligible companies, says Xu. “The new rules keep the rules for GDRs unchanged. These have fewer requirements than for the international secondary listing category for shares,” he adds.
HOW WILL CHINESE COMPANIES BENEFIT?
The shake-up is part of wider reforms to attract global investment as the UK struggled to keep up with other global financial hubs. A number of changes are considered to be conducive particularly to Chinese companies wanting to list in the UK.
Xu points out that in addition to permitting natural persons, such as founders and directors, to have open-ended enhanced voting rights, the UKLR ESCC category now allows pre-IPO institutional investors including private equity firms and venture capitalists to hold extra voting rights for a maximum of 10 years.
“The PRC Company Law amended in 2023 offers a new regime for dual-class share structures, which may potentially narrow the gap for listing on the London Stock Exchange (LSE) by Chinese companies with dual-class share structures,” says Xu.
“Certain Chinese companies with the variable interest entities (VIE) structure in place may also pursue listings on the LSE in addition to the usual U.S. track,” Xu adds. The VIE structure allows Chinese companies to set up an offshore entity for foreign investors to buy into the stock usually in a bid to skirt foreign investment restrictions in sensitive sectors, including technology.
Apart from the dual-class structure, companies with a controlling shareholder will now no longer be required to maintain a relationship agreement to qualify for listing. Previously, this requirement applied to premium listings but not to standard listings.
The FCA pointed out that the new regulations render such agreements practically unenforceable and enforcing them could create obstacles for a wider array of companies seeking to list in the UK. Xu believes this particular change could open the door for more Chinese companies hoping to float their offshore assets on the LSE.
“In particular, if a Chinese company with global assets is already listed on a stock exchange in mainland China, and to the extent a secondary listing is not practicable, a spin-off listing of the offshore assets could be a better option for them,” says Xu.
“In that case, the relationship between the offshore assets and the controlling shareholder in mainland China will be only subject to disclosure and investors will decide whether the arrangement is acceptable according to their own risk appetite,” he adds.
WHICH SECTORS ARE LIKELY TO BENEFIT MOST?
With the removal of the three-year track record requirement, issuers will be able to float their shares even at an earlier stage of their growth cycle. Additionally, Xu contends that a more lenient stance towards dual-class share structures may facilitate the attraction of founder-led issuers, which the UK is eager to engage.
“Chinese high-tech firms who adopt dual-class share structures may benefit more because they often have unpredictable profit timelines and need ongoing investments. Founders prefer these structures to keep control during fundraising rounds,” Xu notes.
“Where a U.S. listing is more challenging for them due to geopolitical or other reasons, LSE may become a better option for them considering the similar flexibility for dual-class share structures under the new FCA rules,” he adds.
