FCA listing rules revamp causes trouble for trust investors

The City regulator’s overhaul of rules for London-listed companies has ‘unintentionally’ diminished the power investment trust shareholders have in controlling the fate of their investments.

Last year, the Financial Conduct Authority (FCA) oversaw the biggest overhaul of rules for London-listed companies in 30 years as it moved to revive capital markets and put London on a more competitive footing with international peers.

Subsequently, investment trusts heralded further changes that allowed them to raise up to 100% of their existing share capital without needing to issue a costly prospectus, an upward revision from the previous 20%. The regulator also halved the length of time between a prospectus being issued and a company listing on the exchange in an effort to make it easier for companies to IPO in an increasingly moribund market.

However, the cutting of red tape has also handed more power to large stakeholders to push through decisions without the backing of smaller shareholders.

Tom Treanor, head of research and portfolio manager at Asset Value Investors (AVI), said the ‘crux of the issue’ for investment trusts is around related party transactions, where there is ‘inherently a conflict of interest’.

Related party transactions are deals between listed companies and another party, such as a director, significant shareholder, or a connected firm, such as a parent company or subsidiary. 

Under the old rules, voting on related party deals would be done independently, stripping out the voting rights of shareholders who were ‘related’ to the transaction. However, the listing overhaul has removed the need for an independent vote, meaning shareholders can vote on the transaction even if they are connected somehow to it.

The rationale for the rule change was to put more power in the hands of company bosses and founders, to try to create a more dynamic and attractive market for businesses tempted to list in America instead of the UK. 

Third Point trouble

Treanor has first-hand experience of the potential conflicts of interest at play, having recently taken Third Point Investors (TPOU ) to task over the investment company’s decision to merge with Malibu Life Reinsurance and turn the London-listed hedge fund vehicle into a reinsurance business.

As part of an activist coalition, AVI opposed the deal, which would be completed via an all-share combination with Malibu Life’s parent company, which is wholly owned by Third Point Opportunities Master fund. Guernsey-based TPOU is in turn a feeder for Loeb’s Third Point Master fund in the US.

Although there was strong opposition to the deal, which was criticised for its lack of transparency, it was waved through on a shareholder vote given Third Point founder Dan Loeb was able to use his 25% stake in TPOU to override any reservations smaller shareholders may have had.

Treanor pointed out that under the previous listing rules, Loeb would have been unable to vote on the related party transaction.

Asked whether TPOU had waited for the FCA rule change before putting forward the vote on Malibu Life, Treanor said the timing of the vote ‘looks opportunistic at best’.

He added that TPOU started a strategic review in April 2024 and it is realistic that it would have known about the FCA listing consultation, with the rules changing at the end of July 2024.

However, TPOU said this was ‘absolutely not’ the case, with the vote happening a year after the changes.

A spokesman for TPOU said the Malibu Like deal was a ‘good example of the sort of innovative transaction that changes in the listing rules were designed to encourage’.

‘Those rule changes were deliberately designed by the government to inject more ambitious risk taking into the system to attract companies to the London market and keep them listed here,’ he said.

‘Ultimately that is exactly what this transaction has achieved, solving the intractable problems inherent in the investment trust sector as a whole while giving investors the potential to participate in the upside opportunity that Malibu represents.’

Prior to the deal, TPOU shares had been trading on a wide and entrenched discount, averaging more than 20% over the past 12 months – Third Point positioned the deal as shareholder friendly due to the elimination of that discount issue.

Bulldozing shareholders

Of the change in listing rules, Treanor said it was a ‘unfortunate consequence’ that TPOU was allowed to ‘bulldoze through’ minority shareholders.

There is also the convoluting factor of ‘vote co’ voting at play, where trusts with a large number of US shareholders – such as TPOU – circumvent Securities Exchange Commission (SEC) rules by installing a ‘vote co’ which holds special voting shares and is made up of a board of three members, all of whom are supposed to vote in the best interests of shareholders. However, Treanor said he does not know of any instance where a ‘vote co’ has voted against the board.

It’s worth noting that governance concerns are at the root of the discount of another investment company run by a US hedge fund group, £7.9bn Pershing Square Holdings (PSH ), which today and often in the last few years has traded on a 30% plus discount. While there is no suggestion that Pershing Square could have similar plans to Third Point, a special share class structure means majority voting power rests with a vote co. 

AVI sent a letter to the FCA flagging the detrimental effects of the listing changes in the TPOU case, and although the City regulator has acknowledged receipt of the letter, the asset manager has ‘heard nothing back’.

‘The FCA were well intentioned in the changes. The London market has seen a lot of doom and gloom…there are a lot of companies leaving for the US, there were questions on attracting companies and whether the rules were suitable for the modern era,’ said Treanor.

‘The idea was to remove the regulation that deters founders and fast-growing companies [from listing on the London market].’

He added: ‘I hope the FCA realises there has been an unintended consequence and moves to plug this loophole.’

The FCA said it did not comment on specific companies. However, the watchdog has previously acknowledged that while its changes will make the UK market a riskier place for investors, they will also ‘better reflect the risk appetite the economy needs to achieve growth’.

A review of the listing changes will be undertaken by the FCA in five years.