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Deliveroo crystallises investor anger over imminent dual-class reforms

Deliveroo’s ill-fated initial public offering has cemented investor anger over planned reforms to UK listing rules that will make it easier for company founders to keep tight control over their businesses.

The food delivery company failed to win the backing of many of London’s biggest investors, with Aberdeen Standard Investments and Legal and General Investment Management citing concerns about the company’s dual-class share structure among the reasons for avoiding the IPO.

The UK is looking to overhaul its listing rules to allow companies with dual-class shares to be admitted to the London Stock Exchange’s “premium” segment. Under this system, company founders often retain greater voting rights compared with minority investors.

But Tom Powdrill, head of stewardship at Pirc, an adviser to big investors, said he hoped companies and their advisers would now think twice about coming to the UK market with a dual-class share structure, arguing it was clear it had a “negative impact” when it came to attracting domestic investors.

“They are called equities, they should be equitable,” he said.

James Bevan, chief investment officer at CCLA, a UK asset manager, said there was a reticence among British investors “to any system that isn’t one share, one vote”.

“[Companies] have to accept that if you want to raise capital, you are going to lose an element of control. There is a delicate balance between control and the appetite to draw investors.”

At Deliveroo, Will Shu, co-founder and chief executive, retains 57 per cent of the voting rights. But minority shareholders complained the structure left them with little protection. Under the current rules, the company did not qualify for a premium listing.

Many other tech companies have opted to list in the US, where dual-class shares are common. The UK government, however, has been keen to boost the City’s attractiveness, with Rishi Sunak, chancellor, endorsing Deliveroo’s decision to IPO in London a day after he recommended the series of reforms to loosen listing rules in the UK.

The review by Lord Jonathan Hill said London needed to maintain high standards of governance, but argued that dual shares should be allowed for premium listings, while also recommending safeguards such as a five-year limit.

Powdrill said he was sceptical about whether the push to introduce dual-class shares would encourage more tech listings.

“We want good companies to list. But is it the lack of dual-class structures that are preventing that? I don’t think so,” he said. “[Dual shares] are weakening the shareholder voice.”

His views were echoed by several big investors. Andrew Millington, head of UK equities at Aberdeen Standard Investments, said the UK needed to “be very careful” about how it approached dual-class shares.

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“We want the UK to be an attractive place for growing businesses to list. But at the same time the UK corporate governance standards are world leading. For me, what is important is that we don’t water down what it means to have a premium listing,” he said.

Sacha Sadan, director of investment stewardship at LGIM, said the UK’s largest asset manager was lobbying the UK’s financial regulator over the proposals.

“What’s wrong with one share one vote? It has worked for a long time,” he said.

Others, however, warned that founders wanted to be able to retain control over the businesses they had grown. Christian Nentwich, a private equity investor and CEO of fintech Duco, said the results of the Deliveroo IPO and the backlash from big UK investors would be deflating for many working in UK tech.

But he added: “Protests about dual-control structure, about the strategy of burning cash to fuel growth, and so on, are irrelevant — companies can simply list elsewhere.”

Ahead of Deliveroo’s listing, Ophelia Brown, venture investor at Blossom Capital, said the success of food delivery company’s IPO would matter for London’s attractiveness.

“More founders will decide whether to list in the UK depending on how the listing goes.”

Additional reporting by Tim Bradshaw

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