The War of the Dual Class Shares (DCS) rages on.
On one side of the battlefield, positioned on the lofty heights of moral superiority, the asset managers (and academics) lob propaganda leaflets pointing out their greater firepower in the form of smug principle and the dollar value of their total assets under management.
Their opponents are a motley crew. There are the Startup Upstarts, whose uniform is expensive sneakers and untidy man-buns. There are also venture capitalists doling out “series A” funding, corporate finance professionals hardened by years of chronic shortages in the capital markets, and the random outspoken lawyer. They face a steep uphill charge because this is kiasu Singapore, where “don’t rock the boat” is an operating principle. Retail investors will not hesitate to blame the government for their investment losses no matter how prominently the risk factors are highlighted.
The latest Skirmish
In February this year, the SGX launched a consultation on DCS, shortly after the Committee on the Future Economy recommended in its report that Singapore adopt this.
The objections have been swift and vociferous, coming largely from asset managers who typically hold significant but minority stakes and would naturally like to see the one-share-one-vote default continue. State Street Corporation and BlackRock, both heavy hitter investors, have voiced concerns.
The proponents of DCS, while not as organized, are equally impassioned. They include investment bankers who have seen the value of the stock market eroded by delistings – witness Osim’s recent “defection” to the Hong Kong Stock Exchange shortly after being privatised in Singapore. There are also investors and hedge funds who worry that Singapore is missing out on the wave of technology companies, and will dwindle into a stock exchange of REITS for retirees.
Blowing Up the Arguments
The main concern about DCS is the unequal voting power accorded to different share classes, and the potential for mismanagement and abuse. But to argue only the principle is to fence with ideas.
We are operating in a global market where DCS are a common feature in companies listed in the US, and the question facing us is whether we want to lose our homegrown success stories to a foreign exchange if the SGX does not permit DCS structures on its board.
Commentators say allowing DCS would open the floodgates to badly run companies. But history is full of examples of companies mismanaged without the help of dual class structures. In 2005, China Aviation Oil’s S$500 million fiasco caused by a rogue chief executive’s forgery and insider trading, shook corporate Singapore.
Purists will also argue that shares with different classes of rights are intrinsically bad. But preference shares, foreign tranche shares, management (golden) shares and share warrants have co-existed peaceably in our corporate eco-system, largely because investors understand that different rights attach to different types of securities.
Rather than a binary position of “yes” or “no”, it may be more useful to consider if the SGX’s framework of rigorous safeguards would be sufficient to protect investors. Would having DCS really open the floodgates?
1. Manchester United: Would history be re-written if DCS had been allowed in 2012?
The debate over DCS started when Manchester United wanted to list in Singapore. The Red Devils, denied their DCS goal, went public in the US in August 2012. Their IPO consisted of a vendor sale for the Glazer family, and a new share issue. This lined the Glazer family pockets, and allowed the company to pare down its debt. Under the company’s voting structure, the Glazer family’s shares had 10 times more voting power than shares in public hands. A successful IPO, reported the Financial Times, would see investors owning 42% of the club’s A shares but only 1.3% of the voting rights. It is hard to see what the DCS structure achieved other than to entrench the rights of the major shareholders.
In my opinion, Man U would not have been a good candidate for listing even if the DCS framework had been in place in 2012.
2. Snap Inc: The case of disappearing shareholder rights
Another negative case in point is Snap Inc, the developer of the Snapchat app. Snap is the first NYSE listed company to issue shares with NO voting rights. The company’s governance was disdained as “a banana republic approach”, but its shares surged 40% on its trading debut this year, giving it a valuation of USD30 billion, roughly twice the worth of Facebook.
Under the SGX’s proposed DCS framework, Snap’s founders would not be allowed to bang the opening gong in Singapore. Our rules would have disqualified the app developer as its shares would not have come within the maximum allowable voting differential prescribed.
Can Singapore afford to retire the field?
Singapore has publicly pinned its “future ready” strategy on embracing technology – implementing regulatory sandboxes for fintech, encouraging startups and most recently announcing a S$150 million investment in Artificial Intelligence. It would be market suicide to seed and nurture our homegrown unicorns, only to lose them when it is time for listing because we do not support DCS. Depressingly, Bloomberg reports that Garena, a Singapore online gaming portal and e-commerce provider, which it described as “Southeast Asia’s most valuable startup”, is preparing to list in the US.
In any event, are DCS companies poison? Do asset managers, predicting the apocalyptic fallout of DCS, shun these investments?
Interestingly, based on public information, State Street Corp and Blackrock, opponents of DCS, are listed among the top 5 holders of institutional holdings in Facebook on Nasdaq.com. They are also invested in Alibaba, both well known for having special voting rights.
Aberdeen Asset Management Asia worries that DCS are a race to the bottom. Perhaps another way to look at it is this: if professional asset managers, notwithstanding their in-principle objections to DCS, feel that it is not commercially viable to avoid investing in companies with dual class shares, can Singapore really afford to keep its doors closed to DCS?
This article was first published in The Business Times on 10 May 2017.