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16 September, 2016
Background
The Singapore Exchange Securities Trading Limited (“SGX”) may soon allow the listing of companies with different classes of shares, in a bid to attract more initial public offerings (“IPOs”) to Singapore.
A dual-class share structure gives certain shareholders voting power or other related rights disproportionate to their shareholdings. Such a structure allows certain holders of shares multiple votes, and grants such holders greater voting rights without the corresponding financial investment risk.
In January 2016, Singapore paved the way for the SGX to permit listing of dual-class shares, by amending the Companies Act, Chapter 50 of Singapore (the “Companies Act”), to allow Singapore-incorporated public companies to issue different classes of shares with different voting rights, with the approval of its members.
In its annual report published on 29 August 2016 (the “Report”), the SGX’s Listings Advisory Committee (“LAC”) was in favour of the SGX referring listing applications of companies with dual-class share structures for their review, subject to various corporate governance safeguards to mitigate the inherent risks of such structures.
Proposed Listing Framework
It has been stated in the Report that the SGX is of the view that a listing framework for dual-class share structures may help to make Singapore a more attractive listing venue to high-quality companies.
Under the proposed listing policy, the one-share, one-vote structure is to remain as the default position for new listings on the SGX, unless a listing applicant has a compelling reason to adopt a dual-class share structure. This is generally similar to the listing rules in other jurisdictions such as the United States of America (the “US”) and Canada, where the one-share, one-vote concept is provided as a default rule, unless otherwise agreed to by the members of the company.
Analysis of Dual-Class Share Listing
A. Benefits
There is a demand for the listing of dual-class shares – global companies such as Alphabet, Facebook and Alibaba adopted a dual-class share structure for certain of its advantages, the most apparent of which would be protection of control for controlling shareholders.
A dual-class share structure protects the management of a company from the demands of ordinary shareholders. In a dual-class share structure, holders of shares with multiple votes are typically the founders who are critical to the success of a business. Adopting such a share structure allows the promoters (usually the founders) to further the company’s long-term plans, separate from public investors who are usually focused on short-term earnings, and grants greater leeway to pursue the long-term vision for the company.
As such, a listing framework for a dual-class share structure may attract listing by companies in exciting growth sectors, where founders play a critical role in the continued success of the companies.
B. Risks and Mitigation Framework
Adopting a dual-class share structure presents certain inherent risks. It has been recognised in the Report that the concentration of control in the owners of a company carries entrenchment risk and expropriation risk. In addition, permitting dual-class share listing also creates risk of poor-quality listings and the risk of lack of awareness by investors. The following risks have been identified, together with proposed safeguards to mitigate the risks.
(i) Entrenchment Risk
Risk Identified. Under a dual-class share structure, minority controlling shareholders with multiple voting rights could entrench their control of the company, by appointing their nominees to the board of directors of the company (the “Board”) and thereby forming a majority in the Board. The nominees are also effectively insulated from the threat of removal, which means that it would be difficult to displace poorly performing Board or management. In addition, the minority controlling shareholders are also able to block takeover proposals at general meetings at their discretion.
Proposed Safeguard. To minimise the concentration and entrenchment of voting rights in the company, the LAC recommends the SGX to adopt the following mitigating safeguards:
- A maximum voting differential of 10:1 between shares with multiple voting rights and ordinary shares.
- Prohibition of issue of shares with multiple voting rights after listing (with an exception for rights issue, which would not increase the shareholding proportion between shares with multiple voting rights and ordinary shares).
Existing companies which had listed with a one-share, one-vote structure would not be permitted to convert to a dual-class share structure, because their shareholders did not invest with knowledge of the risks associated with dual-class share structure.
Automatic conversion of an owner’s shares with multiple voting rights to ordinary shares upon:
- Sale or transfer of multiple-votes shares (unless to permitted holders).
- The owner ceasing to hold his or her role as either executive chairman or chief executive officer of the company.
Other Jurisdictions. Other jurisdictions which permit listing of dual-class shares adopt similar safeguards to mitigate entrenchment risks.
US: NYSE and NASDAQ do not permit an issuer, once listed, to implement a dual-class share structure that would reduce or restrict the interests of existing shareholders.
(ii) Canada: Toronto Stock Exchange (“TSX”) does not allow a company, after listing, to issue securities that have greater voting rights unless they are offered on a pro-rata basis to all holders of the existing listed voting securities.
This would prevent a dilution in the voting power of existing shareholders. In addition, a “restricted voting” share may limit the number of directors that can be elected by a particular class of shareholders.
Expropriation Risk Risk Identified. Dual-class share structures effectively allow a minority shareholder base to control a majority of the Board, which may weaken accountability. Such expropriation risk may materialise when the Board or management engages in transactions that benefit the minority controlling shareholders at the expense of public investors.
Controlling shareholders may extract benefits for themselves, because they are able to retain all the benefits, while the negative consequences on companies are disproportionately borne by the rest of the shareholders. Such risks could result in companies with dual-class shares to see lower returns and a higher share price volatility.
Proposed Safeguards. To minimise expropriation risks, the LAC recommends the SGX to enhance the independence element in companies with dual-class share structure by:
Mandatorily requiring the Board, Nominating Committee, Remuneration Committee and Audit Committee of the company to comply with the Code of Corporate Governance’s recommendations relating to the independence of Board and board committees.
Limiting multiple vote shares to have voting power of one vote per share when voting on the election of independent directors.
The LAC has stated in its Report that the presence of independent directors on the boards of companies with a dual-class share structure provides some level of assurance of independent scrutiny. It should be noted that practically, there may be limits on the effectiveness of such a safeguard, as companies have not historically held such independent directors to account on the discharge of their duties.
Other Jurisdictions. The US provides for contingency fee class action to minority shareholders if the dual-class share structure is abused. This allows shareholders to have recourse to class-action complaints if expropriation risks arise.
In addition, in the US, controlling shareholders and directors alike owe a fiduciary duty of loyalty to act in the best interests of the company and its shareholders. This is in contrast with the Singapore regime, where only the directors owe a fiduciary duty.
(iii) Poor Quality Listings Risk Identified. While permitting the listing of dual-class shares on SGX may attract more IPOs, it may also attract poor quality listings that could erode investor confidence, liquidity and valuations.
Proposed Safeguard. To mitigate the risks of listing poor quality companies with a dual-class share structure, the SGX has identified various measures, including:
(iv) Admission of appropriate companies based on a holistic assessment of factors such as the listing applicant’s industry, size, operating track record and raising of funds from sophisticated investors.
Referral of listing applications of companies with a dual-class share structure to the LAC for advice for an initial period after implementation of the listing framework. This would allow the SGX to benefit from the LAC’s collective practitioner experience.
Lack of Investor Awareness Risk Identified. Investors may not have sufficient knowledge of the risks associated with the dual-class share structures.
Proposed Safeguards. Increase investor awareness of shareholder rights in dual-class share structures through the following means:
- Companies with dual-class share structures to provide clear disclosure of shareholder rights.
- Identification of securities of companies with a dual-class share structure.
- Investor education initiatives.
Conclusion
Listing of dual-class shares carries risks, in particular given our legal and institutional differences with other jurisdictions, such as the US, where activist shareholder culture and minority shareholder protection are comparatively more robust.
On the other hand, while dual-class shares carry risks, such risks should be properly managed instead of avoided.
A listing framework for dual-class share structures, with the appropriate safeguards, could attract more listings to Singapore and provide investors with more options.
Notwithstanding the foregoing, it is notable that a dual-class share structure may only be permitted if there is a compelling reason to adopt such a structure. As such, the practical effects on the SGX and public investors remain to be seen. The SGX will be releasing its consultation paper for the public’s review and comments on this matter in due course.
For further information, please contact:
Pong Chen Yih, Principal, Baker & McKenzie
chen,yih.pong@bakermckenzie.com
