• Dual-Class Share Structure in Singapore
  • January 17, 2017 | Author: Rachel Rui Qi Choo
  • Law Firm: Duane Morris & Selvam LLP - Singapore Office
  • The Singapore Exchange (“SGX”) may allow companies to list with dual-class shares. This is after publication of the annual report by the SGX’s Listing Advisory Committee (“LAC”), which spoke in favour of permitting companies to list with dual-class shares subject to various corporate governance safeguards, as well as the amendment to the Companies Act (Cap 50, Rev Ed 2006), that took effect in March 2016 allowing public companies to issue different classes of shares with different voting rights pursuant to section 64A of the Companies Act.

    Under the dual-class share structure, a company has two classes of voting shares. The first class is with one vote per share, which is the current structure adopted in Singapore. The second class is with more than one vote per share, which results in shareholders (usually the company founders or core members) being given voting power or other related rights that are disproportionate to their shareholdings.

    Benefits of Dual-class Share Structures

    Supporters of dual-class share structures contend that such structures benefit companies because they allow core shareholders to pursue their long-term vision for their companies while concurrently being protected from the demands of the other shareholders who are beset with short-termism. This benefit is especially pronounced for global public companies that usually have a large and varied number of public shareholders. Dual-class share structures also benefit family firms because they allow the founders to take their firms public and stimulate further growth without the fear of losing control.

    The introduction of dual-class shares is intended to reinvigorate Singapore’s listless stock market. Singapore’s initial public offerings (“IPO”) scene endured a barren spell with only 13 IPOs (of which there was only one mainboard listing) where only S$430 million was raised in 2015, a 17-year low. In contrast, in 2014, there were 30 IPOs, of which 12 were mainboard listings.

    Another goal is to enhance SGX’s attractiveness as a listing venue and to broaden and deepen Singapore’s capital market. In this regard, it would make sense for Singapore to learn from past missed opportunities. Hong Kong Stock Exchange (“HKSE”) missed out on hosting the IPO of Alibaba due to its refusal to allow dual-class share listings. Alibaba, which had initially attempted to list on the HKSE under a dual-class share structure in order to preserve control within a small group of partners, ultimately listed on the New York Stock Exchange (“NYSE”) under a dual-class share structure for a record-breaking US$250 billion. SGX also missed out on the opportunity of hosting the listing of a large corporate entity when the football club Manchester United reportedly passed on the chance of listing on the SGX in favour of the NYSE because the latter permitted dual-class share listings.

    As such, permitting dual-class share structures among listed issuers may be necessary so that SGX does not lose out on future potential “Alibabas” and corporate giants. It may also allow SGX to pull ahead of rivals like the HKSE, which does not permit dual-class share structures.

    Opposing Dual-class Share Structures

    While many are advocating this change, critics argue that dual-class share structures go against the principles of corporate governance and erode the rights of investors and shareholders.

    Being entrenched, the controlling shareholders, who are usually on the company’s board, are insulated from the threat of removal and are essentially left unchecked. A dual-class share structure can potentially nullify the rights of ordinary shareholders to hold the management accountable through internal means, such as through the appointment of independent directors. Under a dual-class share structure, the management can easily control the appointment of independent directors, thus rendering this mechanism otiose since the “independent” directors appointed are conflicted. While independent directors owe fiduciary duties to the company, in reality, the situation is complicated because of the high costs of litigation and the absence of derivative actions instituted against directors-resulting in uncertainty as to the extent of judicial remedy.

    More significantly, the insulation may weaken accountability, leaving open the possibility of the management engaging in transactions that benefit themselves at the expense of the majority shareholders. The weakening of accountability also provides room for inefficiencies and capital waste, and this makes it harder for investors to understand the future performance and value the company. When this happens on a grand scale, the stock market becomes a guessing game.

    Further, it has been contended that embracing dual-class share structures will not necessarily lead to a reinvigorated market that boasts big-name companies because it is equally likely that Singapore ends up attracting questionable firms that negatively affect investor confidence in Singapore, thereby affecting liquidity and valuations. This brings to mind the S-chip scandal where listed Chinese companies were found to have forged their revenues on their accounts in order to be listed in Singapore.

    At the same time, critics argue against the underlying presumption that large notable companies favour only dual-class share structures. While proponents for the change cite Google and Facebook as examples of companies with dual-class shares, they do not cite Amazon and Apple as counter-examples of companies without it.

    Balance Between Commercial Necessity and Corporate Governance

    While there is no denying that some companies favour dual-class share structures, a balance has to be struck between protecting the core members of a company and granting them unbridled power. To that end, several safeguards need to be put in place since dual-class share structures effectively do away with internal checks and balances. Notably, the LAC and several commentators have made suggestions to the SGX, which include introducing a maximum voting differential of 10:1 between shares with multiple voting rights and ordinary shares and mandatorily requiring a company to comply with the Code of Corporate Governance issued by the Monetary Authority of Singapore.

    Having said that, even if dual-class share listings are introduced in Singapore, the one vote per share structure is expected to remain the default position for new listings on the SGX, unless a listing applicant has a compelling reason to adopt a dual-class share structure. To that end, the onus is arguably on SGX as the first line of defence to create a robust set of criteria and conditions that eliminate or minimise the risks that dual-class shares bring.