Commercial Awareness Update – W/C 16th September 2024

FCA REFORMS: A LIFELINE FOR THE SHRINKING LONDON STOCK EXCHANGE?

Arm, the Cambridge-based tech sensation, left the London Stock Exchange (LSE) for New York last year. Flutter, the owner of popular British betting sites Paddy Power and Betfair, followed suit last month.

And now, the country’s largest company by revenue, Shell, has threatened to move to a New York listing by 2025, a move that could ‘kill’ the LSE, the Guardian’s Nils Pratley warns.

According to the Warwick Business School, the number of London-listed firms has shrunk by 25% in the last decade.

Why is this a bad thing for the UK?

An extensive, dynamic stock exchange is vital for the health of the UK’s equity markets. In other words, people with brilliant ideas can get the funding they need to get their business off the ground and onto a global stage. As the LSE shrinks, it limits access to the capital nascent British businesses need.

It also contributes to a reputational problem for London. Historically regarded as one of the leading financial hubs in the world, a shrinking LSE could make the UK seem less attractive to global investors.

The Business Growth Fund warns that the UK could also become an incubator economy for the US. In this scenario, the UK takes the risk of developing promising start-ups, only for them to be acquired by US corporations as they begin to scale up to global companies. Our economy can then not capitalise on its growth potential, and its role is limited to ‘incubating’ tiny start-ups.

What exactly is causing this?

There are critical reasons why a listing in London is increasingly ‘unattractive’ to companies. These include:

Valuation gaps

Valuations estimate the worth of a company’s capital (or the price of its shares). Some mid-sized British companies are naturally drawn to the higher valuations on offer in the US to gain more profitable returns on their shares.

UCL’s Dr Kanungo explains this is because there are larger pools of investors in the US, primarily driven by the success of AI and tech giants like Apple, Google, and Microsoft. To put this into perspective, the Evening Standard finds that the UK’s largest 100 firms would be worth £460bn more if listed in New York.

Private equity takeovers

Mid-sized, undervalued companies in the UK are desirable to private equity “vultures”. After acquiring cheap companies, PE firms invest in them to make huge profits on exit (when they eventually sell).

Around 20 LSE-listed companies are facing acquisition bids, with the latest being a £4.3bn US acquisition of British cyber-security firm, Darktrace. Either they succumb to these predatory takeovers or escape to a US listing—seemingly a lose-lose situation for the London stock market.

Complex listing rules

The rules for listing a company publicly on the London market have traditionally been regarded as “too complicated and onerous”. Former Leader of the House of Lords, Lord Hill, has been recommending changes to listing rules since Brexit in 2020.

In response, the Financial Conduct Authority (FCA), the ‘watchdog’ of the UK’s financial markets, announced a significant reform package last year, which came into force on July 29th, 2024. It has been described as the “biggest overhaul of the listing rules in 30 years.”

Chancellor of the Exchequer Rachel Reeves outlined the vision as a “first step in reinvigorating our capital markets… and ensuring we attract the most innovative companies to list here.”

What do the reforms involve?

There are two that significantly change the nature of listing on the LSE:

• Less restrictions from shareholders: Companies no longer need to seek shareholder approval before carrying out significant transactions. A vote will only be required for something as drastic as delisting entirely from the LSE or a reverse takeover (an acquisition by a smaller private company).

• The ability to adopt a dual-class structure: Companies can now issue shares in two ‘classes’. Founders can be issued the higher-class share, which gives them strong voting power, and the general public can be given a lesser share with little to no voting power. This allows companies to be selective about who gets control over their decisions. It is a popular structure on US stock exchanges, with tech giants like Google and Meta using it for their IPOs.

What do people think of the reforms?

Overall, the new listing rules have been received very well. One company, CK Infrastructure, listed in London within a month of its enforcement. Andy Hunter, Deputy Managing Director of the £14bn Hong Kong company, thinks the reforms are a “big attraction”, having “streamlined the process” of listing in London.

City law firms also view it with optimism. Herbert Smith Freehills partner, Michael Jacobs, a specialist in Equity Capital Markets, welcomes the new relaxed rules and believes it revitalises the UK’s market “on the globe stage”.

Letting go of the need for shareholder approval in significant transactions brings risk to investors, who will now have less control over the company’s corporate decisions. However, lawyers seem to welcome this. Mark Austin, a partner at Latham & Watkins who helped the FCA with the reforms, believes it is time to take off the “stabilisers” and embrace a “risk-on rather than risk-off” strategy for economic growth.

Similarly, the Chartered Governance Institute thinks the new dual-class share structure is attractive for UK tech entrepreneurs. By ensuring that only founders are given significant voting power, companies can reinvest profits more freely into research and expansion, with less shareholder pressure to pay dividends. This allows company executives to focus more on funding capital expenditure and, ultimately, growing the business.

Looking to the future

If the reforms are successful, IPOs in London should awaken from their slump. For law firms, this means more work for Equity Capital Markets teams on various transactions, including IPOs, direct listings and capital reorganisation. Law firms must also advise clients listed on the LSE about compliance and regulatory changes.

Former Chancellor Jeremy Hunt wants the UK to develop a ‘British Microsoft’ from start to finish. While London may not match Silicon Valley in the next few years, relaxing the listing rules is a promising first step in persuading British tech start-ups to stay.

• By Pratheesh Prabakaran

AI CLASHES WITH IP

A major problem has emerged for UK legislation, arising from the development of modern AI technology. The problem is rooted in the clash between AI training and intellectual property laws.

AI models are trained with IP-protected content, which includes storing information that can be revisited if the AI software asks a pertinent question. This has led to intense lobbying on both sides of the debate.

One side argues copyright exceptions should be extended to allow the use of copyrighted material to educate AI. At the same time, the other side pushes that copyright owners must be protected, meaning AI creators should be forced to request licenses if they wish to use the published material.

The previous government stated they planned to widen one of the existing copyright infringement exceptions, namely the text and data mining exceptions. This proposed system would not have allowed right holders to opt out, so the material would be freely accessible to AI creators.

This system proposal was highly controversial and caused substantial criticism and complaints, especially from the creative sector. Following this criticism, the government revoked their plan.

Instead, it began considering a voluntary code of practice that would allow content creators to register to allow their content to be used for AI training. However, this system was not delivered during the previous government’s time in office.

Following the recent election, Labour has highlighted the importance of finding the right balance, attempting to ensure strong IP protection while supporting the development of the AI sector. While it remains unclear which action plan Labour will devise, it should be noted that they have advertised their wish for the UK to have a “pro-innovation” approach that will encourage the use of AI.

The current draft of the EU AI Act attempts to address this issue, suggesting that AI providers should be required to publicly disclose details of the copyright-protected works used during the training of AI models. This transparency is an attempt to combat the concerns of copyright infringement that are currently causing heavy debate within the legal community.

Effect on the legal sector

The lack of clarity and guidance leaves England wondering what will address this highly contentious issue. Law firms are left with difficulty advising AI clients on the varying approaches the government may choose, as they are unsure which model the law will adopt and what actions will serve their clients’ best interests.

The government must select a clear route forward, as the Commons, Science, Innovation, and Technology committee has urged. Based on the current information, many argue that a licensing framework may be created to combat this issue, but what this system may look like remains unclear.

Some argue that the system should be based upon extending the current licensing system, which already exists within the Copyright, Designs and Patents Act 1988, while others say that an entirely new system, built with AI in mind, should be born.

It is currently unclear what priority level the Labour government will assign to this issue, but a decisive action plan will be required shortly to address it.

• By Amelia Richardson

DYNAMIC PRICING

This week’s headlines have been dominated by the Government Watchdog’s announcement of an investigation into Ticketmaster’s handling of the Oasis reunion tickets.

Ticketmaster’s dynamic pricing strategy, which saw ticket prices fluctuate between £135 and over £350 as demand increased, has come under scrutiny. This pricing model, likely attributed to advancements in data and artificial intelligence, enabled Ticketmaster to adjust prices almost instantaneously, resulting in significant price variations.

The public outrage has prompted the Competition and Markets Authority (CMA) to investigate their use of dynamic pricing.

What is dynamic pricing?

In simple terms, dynamic pricing is a strategy commonly used by companies to adjust the price of their goods or services in response to changes in demand. However, dynamic pricing is only legal if the terms are transparent and fair and do not disproportionately favour the trader at the expense of the consumer.

The CMA shall determine this using the provisions of the Consumer Rights Act 2015 (CRA).

Notable provisions they could consider

• Section 68 of the CRA 2015 requires that buyers be given clear information (in plain, intelligible language, that is legible) within a sufficient time frame.
• Section 62 of the CRA 2015, which references Schedule 2 of the Unfair Terms in Consumer Contracts Directive 93/13/EEC, prohibits binding consumers to terms with which they had no real opportunity of becoming acquainted before the conclusion of the contract.

How could this be interpreted?

From one angle, the CMA will consider Ticketmaster’s Purchase Policy, which includes a clause regarding dynamic pricing and refusing refunds. If this clause is deemed valid, Ticketmaster would not be in breach.

However, CMA will focus on arriving at its decision and the timing of Ticketmaster’s Purchase Policy. On the one hand, it could be argued that Ticketmaster allowed consumers to read the policy before purchasing the tickets. Therefore, it is binding in the contract, and consumers knew they were not entitled to a refund.

However, it could be argued that the high competitiveness of obtaining a ticket was foreseeable to Ticketmaster. It was unlikely that buyers would read this policy before purchasing a ticket in those circumstances. If the CMA takes this view, they may decide that buyers had no real opportunity to become acquainted with these terms, nor were they informed about this within a sufficient time frame.

Nevertheless, buyers still had a choice to opt out of buying the ticket when seeing the new, higher price. Additionally, it could be questioned whether Ticketmaster could have given this information within a sufficient time frame without knowing who the buyers would be.

Ultimately, the CMA could be exposed to the inefficiency of the current regulations governing dynamic pricing and recommend reform to regulators.

What are the potential outcomes of this?

As a result, if Ticketmaster is found to have unfairly treated consumers through its dynamic pricing strategy, several remedies could be pursued.

First, the CMA could seek a court injunction to stop Ticketmaster from continuing these terms. However, before reaching that stage, Ticketmaster would be allowed to cease using unfair terms, which could prevent the need for legal action.

Consumers may also be entitled to a price reduction or full refund if repair or replacement is impossible. However, this application is rare in practice, as the costs associated with litigation are disproportionately higher than the cost of the tickets. In addition, consumers often resort to reselling tickets at a higher price, profiting from the resale market.

As a result, unless a class action claim is brought, individual claims are unlikely to arise, meaning no redress.

That said, UK buyers might be incentivised by the class action claim in the US after the Taylor Swift Era’s Tour: Sterioff v Live Nation Entertainment Inc. and Ticketmaster LLC [2022]. However, this decision is yet to reach an agreement after being taken to arbitration, potentially deterring UK buyers from bringing a claim.

Could this result in reform?

It is essential to consider that the UK’s government changed following the 2024 general election. Therefore, the reshuffling of department ministers could influence the review, resulting in stricter or more lenient stances than usual, although it remains unclear.

The UK may follow the approach taken by the European Commission last year, which acknowledged that “commercial practices related to dynamic pricing could in some circumstances breach the Unfair Commercial Practices Directive 2005/29/EC.”

This particularly applies when prices are raised during the booking process after the consumer has proceeded to payment. Nevertheless, the European Commission continues to monitor the situation.

It should also be noted that the government may be cautious about imposing severe fines on Ticketmaster, given its importance to the economy.

Ensuring Ticketmaster’s continued success is preferable, as insolvency might lead to a market monopolisation, ultimately resulting in higher prices and fewer options for consumers.

Although it could be argued that Ticketmaster already has a monopoly in this market, Ticketmaster’s downfall could significantly impact the entertainment industry, such as job redundancies or the distribution of live events.

Therefore, whilst the outcome of this investigation remains unclear, many anticipate an impactful decision.

• By Tia Williams-Brown