Several fund managers have elected not to participate in Deliveroo Holdings plc’s (Deliveroo) impending initial public offering (IPO), with concerns over the company’s treatment of workers and the dual class share structure. The roster includes Legal and General Investment Management, which is the UK’s largest fund manager with £1.3tn of assets under management. Similarly, M&G, Aberdeen Standard Investments and Aviva Investors have told the Financial Times that they too will “shun” the listing (“Legal and General joins investors shunning Deliveroo IPO”, Financial Times, 25 March 2020).
Deliveroo is a popular online food delivery company founded in London. Customers use an app or website to order food from grocers, local restaurants or ‘ghost kitchens’ and the food is delivered by self-employed bicycle or motorcycle couriers. Revenue is generated by charging fees to both restaurants and customers.
According to Deliveroo’s prospectus, since its incorporation in 2013 it has expanded its operations to 12 markets, with over six million monthly active consumers globally. To date, it has raised approximately $1.35bn through funding rounds, with a host of stellar investors including Amazon, Index Ventures, T. Rowe, Fidelity and Bridgepoint having substantial shareholdings. Deliveroo has made a net loss in each year of operation, notwithstanding revenue of £1,190.8m in 2020.
The company announced its intention to float on the standard segment of the London Stock Exchange on 8 March 2021, and the prospectus was published on 22 March 2021. The price range has been set at £3.90 to £4.10 per share, implying an estimated market capitalisation on admission of between £7.6bn and £7.85bn per the company’s announcement of price range on 29 March 2021. That would make it the largest IPO in the UK for decade.
Independent workers v employees, workers or quasi-employees
Those fund managers which have publicly stated they will not participate in the IPO have cited concerns about the treatment of workers. The gig economy in the UK has been under scrutiny for several years with pressure on the UK government to address the categorisation of ‘independent workers’. Deliveroo’s prospectus includes a risk factor that “if our rider model or approach to rider status and our operating practices were successfully challenged or if changes in law require us to reclassify our riders as employees” then it would adversely affect the business. The company discloses it is engaged in proceedings on this issue in the UK, France, Spain, the Netherlands and Italy, with an investigation under way in Australia.
This will be familiar to those who followed the high-profile dispute in the UK between the Employment Tribunal and Uber. The UK Supreme Court held that Uber drivers should be classified as “workers” for employment law purposes. As a result, Uber is required to pay its drivers the national minimum wage, grant paid annual leave and allow rest breaks.
The consequence of that decision, and any similar finding for Deliveroo, could materially impact the business model, imposing far greater obligations on any company which relies on gig workers. The operating costs of any such company will significantly increase.
This is potentially the most high-profile example of the impact of the Uber ruling on disruptive technology companies such as Deliveroo.
Dual share class
Fund managers have also cited the dual share class structure as being a dissuading factor, with the fear that corporate governance would be negatively impacted by so much power being held by one individual.
This is another hot topic for the UK. In 2020 the UK Government commissioned a review of the rules and regulations governing IPOs in London following a very poor year in which only 30 companies chose London as the forum for their IPO, representing two per cent of the global total. The review was conducted against the background of the UK Government’s stated aim to be more attractive to technology and life sciences businesses.
The report was undertaken by Lord Hill and was published on 3 March 2021. One of the recommendations, endorsed by the UK Chancellor of the Exchequer Rishi Sunak, was to allow dual class share structures in the premium segment of the London Stock Exchange (the standard segment already allows for such structures). The premium segment is aimed at the largest companies and provides the highest level of liquidity in the listed securities as well as the cache of being listed on one of the most prestigious capital markets.
The report notes dual class structures are not totally alien in the UK, with standard segment listed The Hut Group utilising it, and they are well used in the US (Doordash, Facebook, Peloton) where 20% of listings between 2017 and 2019 featured them. Hong Kong and Singapore reformed their offerings to permit the dual class structures with enhanced safeguards in the wake of HKEX losing out to NASDAQ for the Alibaba listing.
As the UK seeks to position itself as an attractive market for fast growing, founder-led companies, the suggestion is that it seems only right and proper for founders to have a period where they can continue to shape and direct the future of their company. The opposing views voiced by institutions show that change to the UK’s highest tier of the stock exchange should not come at the cost of sound corporate governance principles.