
Dual class shares – Singapore proposes a listing framework for dual class share structures
Monday | 15 May 2017
In June 2015, the Securities and Futures Commission opted not to allow dual class share structures for primary listings in Hong Kong on the basis that such structures would be too risky from the point of view of investor protection. Eng Leng Ng, Senior Partner; and Grace Ong, Partner; of Dentons Rodyk in Singapore, look at the safeguards proposed by the Singapore Stock Exchange as part of its proposed listing framework for dual class share structures.
The subject of dual class shares (DCS) has given rise to much debate in the context of public listed companies. Briefly, a DCS structure departs from the default one-share, one-vote concept by allowing companies to issue different classes of shares with different voting rights (for example non-voting shares or shares with multiple votes). This results in certain shareholders (typically the founding shareholders) obtaining voting rights disproportionate to their shareholdings and financial investment. The pros and cons of DCS structures have been debated extensively, with proponents advocating that DCS structures allow companies greater flexibility in capital management, and investors a wider range of investment opportunities.Consultations by the SGX-ST
The Singapore Exchange Securities Trading Ltd (SGX-ST), in April 2016, sought the advice of the Listings Advisory Committee (LAC) on whether companies with a DCS structure – where shares in one class carry one vote each (OV shares) while shares in another class carry multiple votes each (MV shares) – should be permitted to list on the SGX-ST, and if so, the safeguards to be adopted. While voting in favour of permitting DCS structures to list on the SGX-ST, the LAC nevertheless identified the following key risks with DCS structures:- entrenchment risks, where owner managers entrench management control of the company
- expropriation risks, where owner managers seek to extract excessive private benefits from the company, to the detriment of minority shareholders
- risks of poor quality listings, and
- risk of lack of clarity when investors invest in DCS structures.
Proposed safeguards
Additional listing criteria for DCS structures
To address the risks of poor quality listings, the LAC proposed to admit companies with a compelling reason for adopting a DCS structure, based on a holistic assessment, taking into account the listing applicant's 'industry, size, operating track record and raising of funds from sophisticated investors’. Once the SGX-ST has assessed the applicant as suitable for listing, the LAC proposes that the SGX-ST refers such applications to the LAC for a second-stage review. It is envisaged that such a second-stage review will continue for an initial period after implementation of the listing framework. The restriction to new listing applicants aims to prevent existing listed companies from circumventing this restriction by engineering corporate restructurings, spin-offs or reverse takeovers. Possible additional listing criteria supplemented by the SGX-ST include restricting listings to new issuers with a minimum market capitalisation of S$500 million for primary listings on the Mainboard of the SGX-ST and requiring issuers to have raised funds from sophisticated investors.Safeguards against entrenchment risks
- Maximum voting differential between each MV share and OV share to be 10 to 1, where each MV share carries up to 10 votes and each OV share carries one vote – to minimise the concentration of voting rights in owner managers.
- Restriction on issuance of MV shares post-listing, except in the event of a rights issue – to prevent further entrenchment of voting rights in owner managers, or further dilution of voting rights of existing shareholders.
- Automatic conversion of MV shares in the event:
- the owner manager sells or transfers his MV shares (with such transfer being restricted to another owner manager, an executive director or an executive officer); or
- where an owner manager no longer holds the position of the executive chairman or the chief executive officer or equivalent, in both cases unless shareholders approve otherwise in a general meeting
- where the voting is on the basis that one MV share is limited to only one vote (Enhanced Voting Process) – to ensure that MV shares are solely for owner managers to retain control to facilitate business decisions, and not to make their shares more valuable than OV shares.
- Sunset clauses providing for the automatic conversion of MV shares into OV shares at a fixed future date post-listing – to ensure that special rights are only available for an incubation period during which founding shareholders have the flexibility and security to plan for and make strategic business decisions on the future and growth of the company.
Safeguards against expropriation risks
- Independence element on the board – to provide assurance of independent scrutiny on owner managers’ actions.
- Enhanced Voting Process on appointment of independent directors – to ensure that holders of OV shares have a greater say on the appointment of independent directors.
- Independent risk committee of directors – to oversee the company's risk management framework and policies.
- Coat-tail provision in the event there is a change of control of the DCS company – to ensure that holders of OV shares are able to participate in a take-over offer on an equal footing with holders of MV shares, by ensuring that where an offer is made to holders of MV shares, a concurrent and commensurate offer is made to holders of OV shares.