Dual class shares – the personification of corporate evil?

By Stefanie Yuen Thio

The Listings Advisory Committee (LAC) of the SGX-ST has greenlighted the listing of companies with dual class structures (DCS) on the Singapore Exchange.

This announcement has resulted in quite the corporate furore, in a nation where our loudest complaints are usually reserved for waiting times for MRT trains and at a favourite hawker stall.

Asset management firm, Aberdeen, in a July article with the no-holds-barred title, “Dual Class shares are double trouble”, opines that “if SGX were to yield to calls for dual share classes it would subvert their rights and harm trust in markets”. Academic and corporate governance commentator, Prof Mak Yuen Teen, went further, saying that if dual class shares “can be bought by ordinary retail investors through ATMs and Internet banking, I would suggest that a danger sign flashes on the screen, accompanied by a skull, before the investor can proceed”.

Photograph by Alexander Pang

In the spirit of full disclosure, we should disclose that TSMP has written in support of dual class shares (Is Singapore Ready for Dual Class Shares? Business Times October 14 2015). Singapore’s nimble ability to respond to commercial changes on the international stage has assured our survival in global markets. This is no time to shy away from embracing innovative new structures, especially as the criticisms of dual class structures can be addressed with calibrated safeguards.

Are dual class shares the personification of corporate evil?

DCS are separate share classes that carry super voting rights or other special privileges. Most typically, this special share class gives holders 10 votes per share, versus the usual one-share-one-vote. This lets strategically important founders and key management retain a higher level of voting control.

The biggest complaint about DCS is that public shareholders have their corporate governance rights trampled upon because founders with a smaller shareholding stake have a disproportionately loud voice. Surveys have also found that investors tend to ascribe a lower value for shares in these companies due to the loss of control. The long term business efficacy of DCS has not been proven.

The argument against having this structure in Singapore is stronger because our business community as a whole is less litigious. In the US, contingency fees in litigation allow class action law suits to be easily commenced, possibly keeping management and founders in check.

But there are circumstances in which the limited use of dual class structures may be useful. In industries where emerging technologies are the big drivers, where the innovative ideas of certain key men (and women) are crucial, and where the method of valuation of businesses is not based on traditional metrics like profits, dual class shares could be a lifeline.

Facebook bought WhatsApp in 2014, after the messaging service had recorded a US$138 million loss. Despite this, the social media titan paid a whopping for US$19 billion, of which less than US$4.6 billion was in cash. When it bought Instagram for US$1 billion, the entire price tag was satisfied in stock. In industries where expansion is the only way to survive, the ability to issue stock is crucial. This means dilution for the founders, the very people the company needs to power the company’s plans. In situations like these, dual class structures make sense.

This year alone, of the 88 companies that listed on NYSE/NASDAQ, 18 have dual class shares. A sampling of companies listed on NYSE/NASDAQ with dual class structures suggest that this is an especially attractive structure for technology companies.

The above companies have provisions for converting the special shares into ordinary shares upon certain events or after a certain time period has elapsed. This will give the companies a runway, immediately post-IPO, to pursue their growth plans while shielding minority shareholders from this protectionism extending into the long term.

The Singapore Model

The LAC has recommended that there be ring-fences around DCS structures, notably a sunset date for these super voting rights. It will also be considering the applications on a case by case basis and approving them only where the company has a sufficiently large market capitalization, so that there would likely be enough institutional investors to provide checks and balances to management.

Singapore has not thrown the corporate doors wide open to marauding companies. Rather, this move allows us to keep pace with global markets. We cannot continue to complain about the lackluster performance of the SGX if we do not embrace corporate structures that are commonplace in other listing venues. To the argument that companies with dual class shares will trade at a lower valuation, perhaps it should be up to the investors to decide if a discount is warranted. Did someone say “caveat emptor”?


TSMP law corporation