IR Monitor – 10 May 2023

This week’s news

Who would want to list in London?

If your tech-related company is inclined to list in the UK: your valuation upon IPO will be around 30% lower than if you list in the US, you will also be expected to take a significantly lower salary as CEO, and you will not be allowed to issue shares giving you more voting rights than new shareholders – “why would you want to list in London?” asks Merryn Somerset Webb. The number of companies listed in the UK has fallen by 17% since 2015 and by 40% since 2008, and this trend is attributed to a complicated and onerous listing regime. However, Merryn says the FCA is beginning to recognize the issue and has proposed some ideas to simplify the listing process but they don’t go far enough. To reverse this trend, the UK needs to incentivize companies to list, educate the public on the benefits of investing in equities, and actively encourage investment from pension funds. Lex argues that fiddling with the rules is not the answer to the City’s malaise, as some proposals go too far in eroding investor safeguards and could be counterproductive. The proposal to remove a mandatory shareholder vote on larger related-party transactions looks like more trouble than it is worth, as the rule exists to prevent controlling shareholders from pushing through deals at the expense of minorities, according to Lex. The focus on London’s listing rules looks like a red herring, as the US benefits from a huge tech ecosystem (that generates IPO candidates) and a more liquid equity market neither of which are easily overcome by fiddling with the listing rules.

Short selling is coming under increased scrutiny 

Short selling is coming under increased scrutiny due to the ongoing pressure on regional banks, with some calls for greater regulatory oversight of the practice as short sellers gained $1.2 billion in the first two days of May. Wachtell, Lipton, Rosen & Katz, a top corporate law firm, has written to clients calling on US securities regulators to limit short sales of financial institutions. The law firm has urged the SEC to impose a 15-trading day prohibition on short sales of financial institutions to allow time for regulators to act and for investors to digest information. Wachtell has written that short-selling attacks on banks are not related to fundamental performance and put the US economy at “great risk”. During the financial crisis, short selling was temporarily banned in the US; however, the ban did not achieve the intended effect according to a review by the NY Fed. The SEC has said it is not currently contemplating a short-selling ban. However, US officials at federal and state levels are reportedly investigating the possibility of market manipulation behind recent big moves in banking share prices. While some market participants have criticized short selling, others, like the non-profit group Better Markets, suggest short sellers act as a warning indicator; symptom not cause.

Shareholder activism: Q1 2023 

Nasdaq IR Intelligence has analysed the top trends in activist campaigns during the first quarter of 2023. The analysis has revealed that activism targeting boards, effective short attacks, and an increase in CEO-focused campaigns were the most prominent themes. Although the beginning of 2023 was quieter compared to the record-breaking year of 2022, well-known names in the space continued to be active. Many campaigns initiated in Q1 2023 are expected to play out in the upcoming proxy season throughout Q2.

LSE chief calls for higher UK exec pay

UK executives should be paid more if the country wants to retain talent and discourage companies from moving overseas according to Julia Hoggett, the CEO of the LSE. Hoggett has called for a “constructive discussion” on exec pay in Britain arguing that “We should be encouraging and supporting UK companies to compete for talent on a global basis”. Her comments come amid shareholder revolts against executive pay plans at some of the largest UK companies, including Unilever and Pearson. Hoggett has criticized the decision by some investors and proxy advisers to vote against the pay policies of UK companies which she argued were often “significantly below global benchmarks” and put the UK at a disadvantage. The LSE is looking to bring together the chairs of listed companies, founders of private companies, asset managers, the FRC, the Investment Association, and proxy agencies for talks. Hoggett’s push on pay coincides with a drive from the UK financial regulator to overhaul stock market listing rules to stem an exodus of businesses from London’s stock exchange. City minister Andrew Griffith said Hoggett’s comments “will inform the work we are doing to boost the UK’s offer to companies looking to list in the UK”.

Missing data investors want to know

Critiques of US tech companies’ financial reporting often target the use of non-GAAP figures to flatter performance but attention should also be paid to the lack of disclosure around large segments of their businesses which makes it difficult for investors to judge performance. Many large tech companies do not disclose profitability or subscriber numbers for certain segments. Some companies have tried to abandon quarterly earnings but disclosure in tech remains limited by other means such as skimpy segmental reporting and an overall lack of detail.

And finally … people are worried about share buybacks 

The US Securities and Exchange Commission (SEC) has adopted new rules that require public companies to disclose their policies and procedures relating to purchases and sales of their securities during a repurchase programme by their officers and directors. The SEC is concerned that executives may sell their shares when their companies are buying them back and the new rules aim to prevent this behaviour and address this potential conflict of interest. However, some make the point that executives can only trade during a short window after earnings, which is when companies typically announce buybacks, so the new rules could have the possibly unintended consequence of either preventing executives from selling their shares altogether or preventing companies from ever buying back their own shares. Matt Levine of Bloomberg wonders if this might even be the goal.

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