SoftBank-owned UK semiconductor spurns the LSE​

By Jake Rickman
Image credit: Ned Snowman / Shutterstock.com​

What do you need to know this week?

Last week, the Cambridge-based semiconductor manufacturing company Arm Limited announced that it would pursue a public listing in New York rather than with the London Stock Exchange (LSE). The move is a blow to the LSE and London as a worldwide financial capital, especially considering that successive Conservative governments had repeatedly tried convincing Arm to list in London.

Arm is owned by the Japanese financial giant SoftBank. According to an article published by the FT, SoftBank cited onerous regulatory obligations imposed by the UK’s Financial Conduct Authority (FCA), the principal regulator of listed companies in the UK, as a primary reason for Arm’s decision. Insiders in SoftBank and in the FCA itself specifically cited the FCA’s strict regulation of “related party transactions”.

Related party transactions describe any deal or arrangement between:
  1. a listed company (and its subsidiaries); and
  2. shareholders with substantial control over the listed company or its directors.
Under FCA rules, the listed company must obtain shareholders' approval and notify regulators before entering into a related party transaction. This contrasts with the position in the US, where shareholders need only be notified before the transaction.

It may sound like a technical point, but in practice, the need to obtain shareholder approval can delay a proposed transaction by weeks. Evidently, this was a dealbreaker for Arm Limited and its owners.

Why is this important for your interviews?

For banks, law firms, and investors in the City, the implication behind this story is that the FCA is strangling the growth potential of London and the nation’s wider economy. We should also evaluate this story in light of public investor criticism of listed companies’ governance culture — something we looked at last month. Understanding the terms of these debates will signal to interviewers that you appreciate what is at stake.

Much of the conversation surrounding the FCA’s over-regulation of London’s financial markets has arisen in the context of Brexit and its aftermath. Many directors of public companies, along with their legal and financial advisors, believe that if the UK has had to suffer through all the political and economic uncertainty caused by Brexit, regulators should at least take advantage of the UK’s newfound independence from EU financial regulations. In effect, they want London to adopt a more American approach to financial regulation, which in some respects is more relaxed. This is also the position taken by the Conservative government. As the argument goes, the FCA continues to stand in the way.

It is worth flagging that the FCA is effectively independent of the government and can exercise broad powers in pursuit of its principal objective, which is to ensure the markets are stable. From the FCA’s point of view, the concern is that by liberalising rules such as the restriction on related party transactions, public market investors will lose their oversight functions over the companies they effectively own, which may in turn enable or even encourage public company’s directors and senior managers to adopt riskier management strategies.

The FCA is also concerned that aggressive regulatory reform may result in unfavourable regulatory divergence between the UK and the EU. That is, businesses in EU member states may shy away from investing in the UK because they would have to comply with two substantially different sets of regulatory regimes, which would entail an intolerable degree of risk and compliance expense.