Listing rules, hefty prospectuses and index criteria hardly set the blood racing. But there’s an interesting and potentially important element of the forthcoming Saudi Aramco IPO which relates to exactly these three areas. One that investors would do well to watch carefully.
In the rush to lure Saudi Aramco to London, it seems the UK Listing Authority (UKLA) is looking at a new category of listing – a cross between premium and standard. Floating Saudi Aramco was never going to be straightforward and it seems one of the unusual features of the float is likely to be its listing category.
A premium listing means the quoted business meets the highest UKLA standard, meaning it is adherent to the UK Combined Code, its comply-and-explain principle, the UK takeover code and providing pre-emption rights to minority holders, for example. Premium listing brings numerous benefits – possible index membership and a broader base of potential investors.
The Reuters article seems to indicate that the UKLA is looking at a new category with the prestige of the premium listing but providing flexibility on corporate governance rules and investors rights. Recognising that Saudi Aramco ownership structure is unlikely to meet premium listing standards, the London Stock Exchange and UKLA are prepared to bend for commercial realities and look at something a bit more ‘bespoke’.
Should this matter? It is worth remembering why the UKLA has premium and standard categories. These were introduced to protect investors. Twenty years ago, the London market went on a push to recruit overseas businesses. Some of these foreign commodity players such as Bumi and Eurasian Natural Resources Corporation (ENRC) were involved in governance failures and subsequent significant losses. Rightly, the UKLA took action to tighten controls and strengthen retail and institutional investors’ rights with new rules such as the introduction of a ‘relationship agreement’ between the plc and large shareholders.
So the development of a new category that lowers the governance standards and protections for minority shareholders definitely does matter. It may not matter for the Saudi Aramco IPO, but it might do for the next one in this ‘new’ category. A ‘new’ listing route or option that involves lower levels of investor protection potentially rolls back years of hard-won governance rules and protections.
If investors don’t like the structure, can they avoid the shares? Yes and no. Where this is particularly relevant is in combination with FTSE index inclusion rules. Membership of the prestigious FTSE 100 brings benefits such as better liquidity, guaranteed index fund buyers and easier access to the top tier of institutional investors.As with any elite club, members need to fit the bill. In this case, it means meeting criteria on free float, the UK takeover code and the UK corporate governance code.
Under these current rules, it would seem unlikely that Saudi Aramco would meet the FTSE 100 criteria. Again, the risk for UK investors is that technical rules are ‘developed’ or ‘flexed’ to reflect the special nature of the Saudi Aramco and its owners.
The other important element to this is what will be included in (or more importantly excluded) from the prospectus. The prospectus is the key marketing document that is published by the business and its advisers intending to float. For listing on the London market, this document goes through a lengthy approval process with the Financial Conduct Authority.
Having read many of these documents and written one over the years, the most interesting and relevant section for investors is the risk factors – designed to be ‘specific to the issuers or the industry’. In between the legal language this is where the business flags up any dirty washing, unwanted history and potential future threats. Alongside the governance and other issues related to this unique float, will the advisers and Saudi Aramco include climate change within this section and how the business intends to respond to it? After all, in the words of CEO Amin Nasser, ‘addressing climate change is a critical objective’ of Saudi Aramco.
Perhaps we are being naïve but UK investors have been at the forefront of the governance and climate change agenda and we would hope that Saudi Aramco would be more welcoming of a listing that includes recognition of climate risks, a clearer and quantified commitment to spending on renewables post float, a commitment to meeting and exceeding governance rules and a firm commitment to implementing the recommendations of the Task Force on Climate-related Financial Disclosures. From a UK regulator perspective, we hope that the ‘commercial’ pressures around winning the float do not result in a role of hard earned governance rules that would inevitably result in more dangerous waters for investors in the London market.
With Xavier Rolet, the London exchange CEO, and Prime Minister Theresa May putting in the air miles to press the case for a London listing, let’s hope that the rights and protections that institutional and retail investors have fought hard to introduce over the last 15 years are not swept under the carpet due to commercial pressures. A London Saudi Aramco IPO might provide headlines for London’s prestige, but sacrificing some shareholder rights would tarnish London’s longer-term standing
Toby Belsom is Head of Research & Analytics at ShareAction.