Protecting Minority Shareholders in Blockholder-Controlled Companies – Evaluating the UK’s Enhanced Listing Regime in Comparison with Investor Protection Regimes in New York and Hong Kong

Abstract

The London Stock Exchange is a vibrant capital market which attracts issuers from all over the world, bringing companies with diverse corporate governance practices and norms into the UK listed landscape. The dominant mode of corporate governance in UK public companies has historically been dispersed ownership. However, during the last decade or so, the UK Listing regime has found itself addressing unfamiliar governance issues arising at companies with a concentrated ownership structure. Such companies have typically originated from the natural resources/mining sectors of various developing economies, and initially appealed to investors due to their strong growth prospects. Unfortunately, a series of high profile scandals at Bumi (now renamed Asia Mineral Resources), Eurasian Natural Resources Corporation (now de-listed) and Essar Energy, have tarnished the reputation of such foreign listings and led the UK Listing Authority (the Financial Conduct Authority) to introduce new corporate governance standards as part of its Listing Regime for companies with controlling shareholders (thereafter 'The Enhanced Listing Regime'). The new rules came into force in May 2014.

The Enhanced Listing Regime is essentially a measure of minority shareholder protection. It introduces several prescriptive corporate governance standards to protect minority shareholders in blockholder-controlled companies. These standards are novel in nature compared to the corporate governance standards that have been developed thus far in the UK and in other key listing regimes.

Minority shareholder protections are important to listing regimes due the importance of legal and regulatory frameworks to economic and financial development. Although the original La Porta et al thesis connecting law and finance has since been criticised for its broad brush approach, various methodological inadequacies and incongruence with empirical data, most commentators acknowledge that ‘law matters’ to certain extents in different contexts.

We analyse how the Enhanced Listing Regime works as a minority protection mechanism in blockholder-controlled companies. In the context of the UK equity market, developing standards for the governance of such companies is relatively unchartered territory. We therefore place the FCA’s pioneering efforts in the wider context of minority protection frameworks in global capital markets and engage in a comparative analysis to see if lessons can be learnt from elsewhere.

Keywords: listing rules, concentrated ownership, UK Corporate Governance Code, voting rights, mandatory agreement