After the relaxation of the eligibility rules, companies such as PartyGaming (Gibraltar), Colt Telecom (Luxembourg), and Petrofac (Jersey) sought index entry on the basis of non-UK incorporations. Following consultation with users, FTSE set up a Nationality working party in 2006 to determine whether additional requirements should be imposed on companies that were not incorporated in the UK, and so not subject to UK company law or the automatic jurisdiction of the takeover panel. The working party proposed the following:
- adherence to the principles of pre-emption rights;
- compliance (or an explanation for non-compliance) with the UK Combined Code (now the Governance Code);
- submission to the jurisdiction of the Takeover Panel in so far as practical;
- no controlling shareholder or group thereof.
This last point represented the first time that corporate governance concerns had become embodied in a criterion for index entry. The rationale for this step was that a controlling shareholder could override the wishes of minority shareholders when appointing board members, and be generally unresponsive to requests to meet minority shareholders in convenient locations.
In practice, deciding who or what constituted a controlling shareholder or group thereof proved to be a subjective matter that required debate by the Nationality working party and its successor, the FTSE Nationality committee. As a matter of principle, FTSE seeks to avoid subjective inputs to the construction of its index series and, following the UK Listing Authority's introduction of premium listings in 2010, which subsumed much of FTSE's additional index eligibility criteria, the controlling shareholder criterion for non-UK incorporated companies was replaced with the more objective requirement that such a company should have a minimum free float of 50%. In this way free float became one of the eligibility requirements for index inclusion.
The minimum free float requirement for overseas incorporations has now operated successfully for almost a year. However, towards the end of 2011 FTSE was approached by a group of users requesting consideration of the possible imposition of a similar free float requirement on companies with UK incorporations. The impetus for the request was the observation that several companies with predominantly overseas businesses were seeking index entry by taking UK incorporation. Although some users were concerned that these companies had little overt connection with the UK economy, more were exercised that such companies could avoid the free float requirement imposed on overseas incorporations to the potential detriment of corporate governance standards.
In response to the concerns raised by these users, FTSE undertook a further client consultation in the second half of 2011 which showed overwhelming support for the introduction of a 25% minimum free float requirement for index entrants with UK incorporations.
Although the 25% minimum float requirement had widespread support, many respondents argued that it did not go far enough and that a higher minimum float requirement should be applied universally. Such a float would make it easier for dissenting minorities to block special resolutions put by a dominant shareholder: although theoretically 25% of the votes would be required to block such a resolution, corralling all minority votes would be difficult in practice.
Other respondents argued that a higher float requirement would limit London's attraction as a primary market and the future investment opportunities available to UK investors. Further, it was not clear that any of the governance grievances attached to existing constituents would have been headed off with a higher float requirement.
In the light of these opposing viewpoints, FTSE is undertaking further consultation with index users and industry bodies to investigate the merits of a higher free float requirement versus the imposition of additional governance requirements on companies. The announcement of the UK Listing Authority's own consultation on changes to the listing regime is particularly timely in this regard.
Irrespective of any future changes to entry requirements, the use of free float as an eligibility requirement for a company as distinct from a tool to weight specific securities has highlighted the need to further tighten the definition used in this regard. Accordingly, proposals regarding the consideration of voting rights, including those attached to non-ordinary shares and those associated with total return swaps entered into by restricted shareholders, will be presented for discussion at FTSE's practitioner committees.