The decision by Jardines to jettison premium listings for its group companies in London is, on the face of it, a snub to regulators anxious to restore the City’s reputation for corporate governance

March 10, 2014 7:47 pm

Jardines sidesteps, others will not follow

By Sam Fleming and Jennifer Hughes

The decision by Jardines to jettison premium listings for its group companies in London is, on the face of it, a snub to regulators anxious to restore the City’s reputation for corporate governance.

The trading house has decided it is preferable to sidestep the tougher listing rules set to be introduced later this year than to undergo the corporate contortions that may be needed to comply with them.

But lawyers and governance experts argue that Jardines is likely to prove a special case, rather than the start of a wave of listing downgrades in London.

Maintaining a premium listing remains attractive even under the tighter rules being introduced by the Financial Conduct Authority, because many investors see higher governance requirements as a “badge of quality”, lawyers argue.

Mark Austin, equity capital markets partner at Freshfields, a City law firm, says the new regime – aimed at curbing the influence of controlling shareholders – strikes a better balance than earlier, more onerous proposals.

Given that a premium listing enables shares to be included in funds tracking FTSE indices, he expects companies to continue opting for the higher standards in a bid to lure investors.

“I don’t think you will see any trend away from premium listings,” he says. “You will see the slow gravitation from standard to premium [listings] continue – mostly because of the attractions of FTSE indexation and the higher standards of corporate governance.”

Colin Melvin, CEO at Hermes Equity Ownership Services, believes some companies with particular ownership structures may decide to avoid the rules. But he says the FCA has got the regime right. “There is unlikely to be a widespread response,” he says.

London’s listing reforms have largely been drawn up in response to a series of scandals surrounding natural resources companies, in which the interests of certain investors were not safeguarded. Furores involving companies such as Bumi Resources of Indonesia and ENRC, which ran mines in Kazakhstan, raised concerns that the UK was allowing governance standards to crumble as it scrambled to attract companies to London.

The outcry led to a consultation by the FCA, with new requirements enhancing the rights of minority shareholders due to come into force this summer.

However, the regulator dropped some of the tougher measures for fear of damaging London’s attractions as a market.

Under the latest proposals, where a controlling shareholder has more than 30 per cent of the votes in a premium-listed company, transactions with the company will need to be on an arm’s length basis, with a “relationship agreement” in place to govern dealings.

Independent shareholders will gain the power to veto transactions between the company and its controlling shareholders, and have extra voting power when independent directors are elected. Earlier proposals to force companies to have a majority of independent directors on the board were dropped, in favour of maintaining softer “comply or explain” standards.

Jardines operates as a complex web of companies with cross-shareholdings that sit awkwardly with the new requirements, lawyers say. Since its formation in 1832 by Scots William Jardine and James Matheson, Jardines has been run by the family and its descendants, now the Keswicks.

The group points out that its companies are already outside the FTSE indices in the UK, limiting the immediate consequences of the planned listing change.

Jardines also says its move to standard listings “will allow the Group to maintain its existing structure and governance model,” adding: “These are well-suited to Asian conditions and have enabled each Group Company to… produce sustained growth in shareholder value.”

Maegen Morrison, equity capital markets partner at Hogan Lovells, a law firm, says she can see why Jardines’ structure might lead it to seek a standard listing. But for most premium-listed companies with simpler corporate setups, a shift to a standard listing would not be attractive in the eyes of investors, she warns.